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Taking someone else’s money for your business is a serious move with serious consequences. So you need to know what you’re getting into when you take on investors in your business by examining these strategy advantages and disadvantages.

Your growing business may require capital. That may take the form of money blended from several sources, including:

• Credit.
• Savings.
• Profits.
• Investors.

The decision to engage investors is a serious one. After all, it may involve releasing some ownership of your business. Then again, multiple stakeholders might be just what your business needs to ascend to the next level of success.

Should you take investor money? Consider these advantages and disadvantages.

Advantages

• Additional value – an investor can bring value to your business beyond money. They want to see your business succeed. Investors can contribute money, expertise, connections and resources.
• It’s not your money – too many entrepreneurs put all of their own money on the line. While it’s important to have ‘some skin in the game’ in terms of personal investment, money from outside investors will help minimize your own financial risk.
• Access to growth capital – investors can probably contribute larger amounts of capital than you can personally generate from savings, cash flow and profits.
• Advocacy – investors generally expect a financial return through dividends, growth in the value of their shares, or a future sale of the business. To help you, many investors are willing to advocate for your business by leveraging their professional network. For example, an investor might introduce you to a major source of new business.

Disadvantages

• Obligation – taking someone else’s money, either as a loan or investment, means you must pay them someday.

An investor wants to enjoy a return on their financial investment in the form of interest, dividends or increased share value. They want to make a profit. Are you comfortable with that obligation?

• Shared ownership – a traditional investment scenario involves giving the investor shares in your company in return for funds. While you should ideally enjoy control of your company by retaining a majority of shares, you’ll still have to answer to the other shareholders on business issues regarding profits, sales, expenses, management decisions and overall company performance.

Shareholders may have rights to receive information, vote on certain matters and attend shareholder meetings. Public companies must generally hold annual general meetings, while proprietary companies often do not.

New minority shareholders in a propriety company will want a shareholders agreement. A shareholder agreement may deal with voting rights, director appointments, dividend policy, exit rights, buy-sell provisions, deadlock resolution, restraint clauses, future capital raising, and more.

The more investors you allow, the less your percentage ownership becomes. This is the case whether you sell some of your shares or have the company issue more shares.

• Dilution of control – Many founders assume they can continue operating exactly as before after raising capital. Directors owe duties to the company and can face personal liability for breaches of those duties.

As director, you must act in good faith, avoid conflicts and properly exercise powers.

• Less profit – your investors want to see a return on their investment, so you can expect to earn less money as you must share business profits. Because you’ll own fewer shares, you’ll receive a smaller share of profits.

It’s worth a conversation with your team of advisors before you decide to approach investors. Consult with your accountant, lawyer, financial planner and banker to obtain a healthy variety of opinions. And, speak with other business owners about their experience with investors.