Choosing An Investor For Your Small Business

Last updated on: May 24, 2022

For your small business, taking on a partner or an investor may feel like taking on a life partner.  A small business owner may decide to take on a partner or an investor to get additional capital to work with or to get assistance with running the business.  When you choose to take on other people or entities to help with your business, you need to pay attention and take some things into consideration because it could affect your business negatively.

If your small business is looking for financial assistance only, then your primary focus may be on how much input the potential investor will want in return for the investment.  Does your company need just a financial boost, or could you benefit from technical advice from your investors? You must ensure that your expectations of the relationships are communicated, as well as understand the investor’s expectations.  Of course every investor relationship you enter into should be covered by a written agreement.  This can relay each party’s expectations and ensure few or no miscommunications.

Additionally, if you are only seeking a short-term investor to provide financial backing for a particular project, you should work out the details of their compensation, and document a set date for the relationship to terminate.  If additional time is needed, you can add clauses to the agreement to deal with that eventuality.

Decide how the investor will be compensated before you chose the investor.  This may change depending on negotiations with the investor, but it is good to have a plan nevertheless.  Some options may include granting the investor a seat on your board of directors if you have one, or granting a share of the company.  Your compensation plan may end up divesting you of too much of your company; therefore, in some cases you can consider getting a loan from the investor to be paid back with interest.  Depending on the kind of financing you choose you should consider how it relates to your business structure.  For example, equity financing may affect a sole proprietorship in different ways than it would a corporation or limited liability company.

Because in some cases investors may have a lot of input into your business, you should also consider whether or not the investor you chose has similar beliefs or interests as your business.  Ask yourself if your investor believe in your core business purpose or vision.  This can limit the disagreements that may come up when the investor suggests making changes to your business that go against your business model or vision.

Contact a North Miami Business Attorney

If you are a small business owner considering taking on new partners or investors, and setting up your business under a corporate or other legal structure to accommodate this move, consult an experienced business law attorney to ensure that you comply with the legal requirements and protect your business.  To find out more about how a business attorney can help your business, contact a North Miami business law attorney at the Charlip Law Group L.C. for a consultation today.

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