Before finalizing an agreement with your investor, tap these 6 tricks of the trade to ensure you get the best deal.
The 1980 USA Olympic hockey team executed arguably the biggest upset in sports history. The unit, which consisted of only amateur college players, defeated a seasoned group of Russian veterans that had previously won multiple world championships.
The American coach, Herb Brooks, assembled his team not by looking for the most talented players or the fastest skaters, but instead by selecting the players who fit within his system, within his plan and who fit best with each other.
“I’m not looking for the best players,” the American coach famously quipped in the movie Miracle. “I’m looking for the right ones.”
Likewise, the best deal for funding your business isn’t always about getting the maximum amount of cold cash. You must also consider which terms are the most favorable, how much equity you are allowed to keep and how much control you retain over operations.
Consider the following factors before closing any deal:
How much capital do you absolutely need? Don’t take too much. Running leaner forces you and your team to focus, make good decisions, and limit waste.
You’ll probably be trading equity in your company for capital. Give up as little of your business as you can. Consider taking less money at first and using it to prove only your basic concept. Once you’re concept is proven, you can raise more money at a more favorable rate than would have otherwise been possible.
If you borrow money, understand if the loan is guaranteed or not. Also consider the rate of interest, how the interest compounds, and how fast the principal is required to be repaid.
How much equity are you trading away? What kind of return are your investors expecting? When do they expect to be paid?
Preferences are contractual rights of investors and dictate the outcome of specific financial events. For instance, if you sell your company, investors might be repaid first and might receive two to three times their investment. Don’t overlook the contractual fine print.
Investors primary contribution is generally operating capital, but some investors bring other types of value to the table as well. Some will offer you knowledge about your industry or strategic contacts and partners. The overall value an investor brings your business is more important than the strict numerical value.
Before you finalize outside funding for your company, make sure you understand the tricks of the trade. This will allow you to ensure you are getting not only the best deal, but more importantly, that you’re getting the right deal.