One of the toughest challenges faced by a startup is securing funds. Fundraising through investors may not be the first option in an entrepreneur’s mind as it is often looked upon as a threat to his autonomy. The challenge for the entrepreneur here is to strike a balance between keeping investors interested and maintaining control over his business.
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Entrepreneurs are often advised to go on a fundraising drive only if there are no other options available. Investors are likely to want a seat on your board. So, the most important term to look at before closing the deal should be the one that talks about the investor’s control over your board. Ensure that numbers are not tipped in their favour. The best scenario is when you have more board members who are independent and, preferably, on your side. In case the numbers are equal for both you and the investor, you need to be mindful that there is no collusion between the investor and the external director whose vote will matter.
Here are a few tips you can use to keep the investor and control over your business.
A dual-class ownership structure can also be useful to retain ownership. Consider having and owning a different class of shares that have multiple votes to each vote of the common shares. This super voting share should never be given to the investors. At the time of closing the deal, also push for the right of first refusal of equity to retain voting power.
Josh Hannah, an early stage tech venture capitalist, assures that a credible investor would not try to take over the reins of the company. This might work against the reputation of the investor. While this gives some solace, entrepreneurs are known to have sleepless nights because of investors. This may be because investors are looking at good returns for the money they have brought in. Having an investor who shares your vision and values can heavily reduce such strains. Thus, it is imperative that the entrepreneur chooses investors only after researching and understanding them properly.
It is common knowledge that the startup and the entrepreneur are both thoroughly evaluated by investors before they close a deal. It is equally imperative that the entrepreneur does his due diligence on investors, too. It not only helps in understanding the larger vision and working style of the investor but also gives an insight to their likely responses in case of success or failure. Hence, it is important to talk to both successful and failed companies the investor has funded in.
As Paul Graham notes startups raise funds at different stages and more than once in its lifetime. At an early stage or for smaller amounts, it might be wiser to go the bootstrapping way. Bootstrappers, or entrepreneurs who fund their initiative with their savings, can focus completely on their business plan instead of diverting efforts to fundraising. The next best way is to raise loans or investments from friends and other personal networks. While it might be uncomfortable for some to do so, these investors are also least likely to be motivated to take control of your business.
The source of funds that best suits your needs will be determined by the stage your startup is in, the associated industry it works within and the amount required for it to take the next step. Do not raise too little or too much funds. Whatever be the case, ensure that you make progress before you raise funds. This will raise your negotiation power with potential investors. Investors like successful entrepreneurs. You are likely to attract more investors who want to work with you if you can show early profits.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)