Tony Nicholls
Investment in new businesses can come in many different forms, from business angels who only supply cash, to investors that are happy to spend their time, money and effort in mentoring young entrepreneurs. Here I am writing about the latter.
I frequently come across young aspiring entrepreneurs, who are looking for investment and guidance from more experienced business people. However, worryingly, more and more are complaining that the mentors and investors in their businesses simply want to get in on the act, obtain as much equity for as little as possible, add little in the way of value and then sit back and hope the rewards come their way.
An investor can give you money, material investments such as premises, services like accounting/marketing/PR, hardware and hosting, email lists, contacts and so on, the list is endless. However, a business has 100% shares, and every one you give away, will cost you in the event of a sale.
Over the years I’ve helped mentor a number of young entrepreneurs, many of whom I’ve helped extricate from the rogues above, so here is a quick list of do’s and don’ts for entrepreneurs looking to get their very own Dragon:
1 Unless you are receiving a financial investment in your business, never give up equity – it’s the most expensive type of money you’ll ever take.
2 If you’re offered guidance for an equity stake, be very careful. Get a short agreement drawn up outlining the guidance you expect, the time spent and what equity you are willing to give away for this advice. Ensure your lawyer can extricate you from this in the event that the guidance is not up to scratch.
3 If you do give away equity, try to negotiate some type of equity buy back, this way the investor gets their money back, you get some equity back and the investor still has a long-term stake in the business.
4 Value your business realistically, and be aware that to get an investor that is going to work with you to make the company successful, it’s likely that you’ll have to give up a 15-25% shareholding as they will also be aware that they may be diluted in the future.
5 Value the time you have with your mentor, and use it wisely. Create agendas for meetings and stick to them.
6 If you are offered incubation for your company, get an agreement, so you know what if anything it’s going to cost you. You wouldn’t rent an office without this type of agreement, would you?
7 Get an understanding of what businesses the investor has been involved in the past and try to understand what value and how they added to those businesses.
8 Understand your investors’ commitments to their other businesses and check that the time they are giving you doesn’t mean working 8 days a week for them!
9 If the investor tells you how important they are. YOU’VE got the WRONG INVESTOR.
10 If the Investor tells you how much they cost to spend time with you. (Unless you’re wasting their time) YOU’VE got the WRONG INVESTOR.
Shaz Manelli
