4 Ways to Determine a Good Investor’s Deal
Mirabel started her fashion business as far back as 2020, with funding from her savings and money from family and friends. Because she was very good at her work, she attracted lots of clients, but it became difficult at some point to accept all orders. This then was when she knew she needed to expand, however, there was no funding.
She had restrictions in terms of the number of employees she could afford to pay, number of sewing machines, and limited workspace — thus, funding was needed to scale, which led to the search for an investor.
Many business owners are like Mirabel. They started their businesses with personal funds, however, they need funding to scale. For some others, they intend to start a new business, which requires a huge startup capital. So, they need investors to provide funds and guidance from the very beginning.
Whatever category you fall into, it is important to apply wisdom when seeking investors for your business, be it Venture Capitalists, Angel Investors, etc. In this article, we’ll examine the factors to consider when accepting an investor’s deal and how to avoid falling prey to bad investors. Let’s dive in.
You should read: 7 Loans Application Mistakes Small Business Owners Must Avoid
Factors to consider when accepting an investor’s deal
First, you need to check if you have everything ready to get an investor interested in your business. With our free funding checklist, you can evaluate your business to see if you are investment-ready or not.
Now below are 4 key things to consider before accepting an investor’s deal.
1. Balance in equity and benefits
When an investor agrees to fund your business, they automatically will be getting a stake in it. This means they will own a percentage of your business equity, which will give them the right to make decisions for the business to an extent.
So, when striking a deal with an investor, be clear on how much equity you are willing to give out. Also, ensure their responsibilities and rights are clearly stated, to avoid conflict of interest.
2. Reasonable terms and conditions
You should also assess the terms and conditions attached to the investment to be sure they are things you can abide by.
Check conditions about your present and future employees, how profits will be shared in the situation of a company dissolution, the expectations they have of you, etc. This is key so that you get a great deal out of the investment, without feeling like you’ve been cheated after conclusions have been made.
3. Transparency
Transparency and honesty are key virtues you mustn’t overlook when signing an investment deal. Signing an investment deal is like going into a relationship with someone, and without trust, such a partnership will never last.
So, check if you can trust this person and if they are open and honest regarding the contract. This is key to avoiding vulture investors who are out to make you lose your business to them in situations when you fail to meet certain expectations.
4. What else do they offer?
Aside from funding, you need to consider what else they bring to the table that you may need. For example, angel Investors and capital ventures are different in how they go about investing in businesses.
So, you need to decide what else you need from your investors aside from money. This could be advisory, connections to a network, access to certain equipment, etc. This will determine the type of investor you approach or accept funding from.
How to avoid falling prey to bad investors
To avoid falling prey to wrong investors who mean you no good, here are some things you should pay attention to.
1. Don’t be desperate
Being desperate for investors’ funds is like placing a fog of smoke before your eyes, it will lead to making bad decisions and biased judgments. So, be clear-minded and level-headed when seeking funding.
This helps you to identify investors who are interested in growing your business and those who have ulterior motives. Not being desperate also enables you to let go of good investors for great ones that fit what you need for your business in terms of funding, mentorship, advisory, etc., and not only for the funding.
Related: How to Identify and Avoid Loan Sharks when Seeking Funds for Your Business
2. Investigate the investor
Another important factor is investigating the investor to know who they are, the kind of investments they are involved in, their past deals with other companies like yours; if any, their track record in the industry, etc.
This will enable you to know who you are dealing with and help determine if they are the right fit for your company or not.
3. Review the terms of the deal with a professional and your team
Reviewing the terms of the deal with a professional and your team members will save you lots of heartache. With a professional, you can detect red flags, and your team members can also raise concerns and questions about some conditions you may not have paid attention to prior.
You should read: A Comprehensive Guide to Creating a Business Budget
4. Be clear on expectations and avoid unreasonable ROI demands
In addition, be clear on the investors’ expectations to know what they expect from you in terms of return, control, etc. This is key to avoiding unmet expectations that may lead to bad blood.
So, know what they expect to get as their returns, and ensure you don’t agree to any unreasonable expectations that you cannot meet or that will affect your business negatively, in a bid to sign an investor.
Raising Investments for your business the right way
The kind of investor that invests in your startup can either make or break it. So, it’s important that you look before you leap and take your time to do your due diligence before accepting any investment offer that comes your way.
At Triift Africa, we can help you get investment-ready, ensuring you know the right way to pitch your business, what to look out for in an investment deal, etc. Book a session to get started.
If this was helpful, kindly clap as much as you can to let us know how valuable you found it. Remember, you can give up to 50 claps.
