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Mainstream business investment advice usually tells us this: A business owner seeking investment capital should go out and find InvestorsThen once they decide they want to invest, those investors set the terms of the offer.
What does this mean for the business owner in the next five to 10 years? Mostly, it means that the owner has no control over what their business looks like and they follow the terms set by those holding the purse strings.
If you are a business owner and this sounds unpleasant to you, I have good news: Business owners can set their 100% own Investment terms — define how the investment is structured and what the relationship looks like — then Go out and find out Investors connected to values Those who believe in their business and want to help it grow.
What’s the catch? Well, to make option B work for you, you need to work on creating your own out-of-the-box investment offering. That means building the knowledge, team, and expertise to structure an investment offering that’s right for your unique goals, values, plans, and projections.
Fortunately, I’m an expert in just this type of work, and in this article, I’m going to share with you the basic information you need to know to begin this process.
Definition of “Investment”.
“Investment” is a vague term that simply means that someone is giving money to someone else with the expectation that, somehow, they will get their money back, plus some extra. Investment can be done in several ways: An investor can lend money to a business, which is called debt investment.
They can buy a part of the company, called equity An investment or they can buy some kind of convertible instrument that starts as one thing and later converts into another thing. It is important to define the terms on which people are investing in your company.
Who should define investment terms?
Given that there are so many ways to structure an investment (literally countless ways) who should decide what the terms of the investment will be? Frankly, I’m always amazed at how many entrepreneurs will talk to investors without being clear about the terms they’re offering and willing to accept.
I think it’s because business owners are often told not to worry about terms because the investor will decide how they will invest in your business. But that’s not a very good idea because the way someone invests in your business has a lot to do with the likelihood of success of your business, the likelihood of having a good long-term relationship with your investors, and whether the entire partnership runs smoothly or goes off the rails.
i believe Conditions of Investment That should be decided by the founders of the company, not the investor, because the founders know best what will be most aligned with their vision, mission and goals. That’s why I work with my clients to create their own investment offerings, designed to fit exactly what’s right for the company.
Related: Stop competing on price – compete on value
Debt Vs. equity
A fundamental decision to make about the type of investment you are going to offer is whether it will be debt or equity Investment Debt With an investment, someone lends you money that you agree to pay back with interest. Advantages of debt investments include that they can be easier to document and understand; Investors may perceive it as less risky because debt repayments usually take precedence over repayments to equity investors; And you don’t give up any ownership of your company. Opposition a Debt Investments Include that it may look bad on your balance sheet and therefore prevent you from getting another loan; It must be paid back to prevent default; And the payment usually can’t be delayed too long, or there’s a risk that the IRS could recharacterize it as equity.
Equity investment means that the investor buys an ownership interest in your company. Equity must be “priced,” meaning you and the investor agree on a specific dollar amount per share of your company known as a “price round.” Unless you’re planning a venture capital-type investment, which depends on future sales at a higher valuation than the investor bought, the value you set isn’t that important.
The advantages of equity investments include that equity usually does not have to be repaid and looks good on the balance sheet. Disadvantages of equity investments include that you are giving away some of your company’s rights, and equity investments can be more complex to document and understand.
The standard venture capital investment model is a type of equity investment that, in my opinion, is not appropriate for most businesses. Yet many lawyers and business financial consultants recommend it as a one-size-fits-all approach. With the venture capital model, an investor buys a piece of your company at a certain price with the expectation that in five to seven years, you will sell the company to a larger company for at least ten times the price. It is very difficult for most companies to grow that fast in such a short time, so every aspect of the company must be dedicated to rapid growth at any cost following this type of investment.
However, there are many other ways to structure an attractive equity investment offer that does not require the sale of the company to pay the investors.
Related: Investors can protect their money by focusing on one critical step
Defined terms
If you’ve ever raised money or looked into raising money, you’ve probably heard of “term sheets.” The term sheet defines the details of the investment, including the investor’s right to receive payment and the investor’s voting rights, if any. While a term sheet isn’t required to get investment, it’s a useful tool when raising money outside of the VC model because it enables you to describe exactly what the investor will get when they invest in your business.
Once you have decided between equity and debt, you can describe the details in a term sheet.
You may want to decide whether or not to offer dividends for equity investments. Dividends are a way that you can pay investors without having to sell your company. Dividends are paid to investors when the company becomes profitable. Once the company starts becoming profitable, some of the profits are paid out to investors in the form of dividends.
Another element to include in an equity term sheet is “Liquidation Preference”. a Liquidation Outlines what happens if you sell the company or go out of business. There are several ways to structure a liquidation preference, and you can decide what you want it to look like: What will the investors get in the event of a sale? What will you get? For example, I have some clients who don’t want to be forced to sell their company, so they set up a liquidation preference so that if they were ever to sell the company, the investor can only get back what they originally put in. And nothing more – discouraging the investor from forcing the founder to sell.
A third item to consider putting in an equity term sheet is “redemption options.” This is another way that someone can exit their investment without you selling the company. Redemption occurs when someone who has invested equity in your company exits the investment by selling his stock or equity in the company. Again, there are many ways to structure it so you can buy out the investor over time.
If you decide to offer debt, there are also many options. For example, you can structure a revenue-based debt instrument that provides your investors with quarterly payments that vary based on your company’s revenue.
If you decide to offer a convertible instrument, it is up to you what triggers the conversion, e.g. From debt to equity. For example, a conversion might occur when your business reaches a certain level of gross revenue.
These are just some of the terms you might consider including in your term sheet and which ones you choose, and the details of the provisions will be determined by your specific situation.
Related: 6 Steps to Finding the Right Investors for Your Business
What do investors want?
When you what technology The investor offers Crucially, values-aligned investors usually have other considerations when deciding whether or not to invest in your business. For example, your ideal investors will want to support the results or impact your company is having on your community, employees, or planet.
Investors may also be looking at the risk associated with an investment – how likely they feel to get their money back. If an investor knows you and trusts your abilities and dedication to the company, they may be more likely to invest (they may be tired of investing in faceless Wall Street companies whose managers often care more about short-term profits than long-term ones). seem to care about the long-term interests of their investors and other stakeholders).
When talking to potential investors, first make sure they are aligned with the values and passionate about your company’s mission. Once that is established, show them your customized term sheet and explain the thinking behind it. Your investors will likely be impressed that you took the time to design your investment terms based on your plans, goals and values rather than pulling a cookie-cutter document off the shelf. If you’ve taken the time to thoughtfully design your terms in a way that creates the greatest potential for long-term sustainability of your company, reasonable returns for investors, and positive impact on people and the planet, there will be investors. Who will enthusiastically say yes.
In conclusion
There’s a lot to be said about creating compelling values-aligned investment offerings, but it all boils down to working to define what you want out of the investment and being realistic about design terms that align with your investors’ goals. About what is possible. Once you have your customized term sheet, you can start connecting with values-aligned investors with confidence.
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