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I need capital to grow my business but my most promising investor wants a large slice of the company. What should I do?

Monday, 28 February 2011 | By Philip Alexander

What are your thoughts on ‘a big slice of nothing versus a small slice of something’? I need capital to grow my business but my most promising investor wants a large slice of the company. What should I do?

 

There is an apocryphal saying doing the rounds, “Would you rather have 1% of Wal-Mart or 100% of the corner store?”

 

I can think of many cases where highly successful business leaders have raised capital and effectively “given away large slices” of the business but used that capital to grow many times larger and faster than could have under their own steam.

 

In the online world, Mark Zuckerberg is the current leading example of creating enormous value but retainining only a small(ish) stake in his company Facebook.

 

A little closer to home, the Basset brothers floated Seek in 2005 but retained less than 12% of the company each. It is now the largest online employment classifieds business in the world.

 

Indeed the obverse of this is also true; it is very rare for businesses to grow without raising debt or equity at some stage whether to fund R&D, for working capital, or to make acquisitions.

 

So how much capital to raise, from whom, and on what terms and valuation? This is probably a top five challenge for a business (along with planning, execution, hiring staff and attracting customers).

 

Your investor should ideally add more than capital to your business. They should bring connections, customers, industry expertise, and a path to exit.

 

They should be able to advise and mentor you and your team. They should have access to additional funds if needed.

 

If they can do all this, they should be given a “large slice” of the business. If they can do none of them, you should not accept their investment at all.

 

How do you test that the investor is right for you? Try working together for three months with weekly calls or meetings to outline business progress and key challenges.

 

Meet with some of the potential investor’s business network. Make sure there is a cultural, business and personal fit. If you are still in love with the idea of working together, then proceed to negotiate terms and valuation.

 

Ensure that you have your own expert legal and tax advice at every stage of your company’s growth to safeguard your interests. At all times be as open and honest as you can about your plans, results, goals, concerns at all stages of the company’s growth. Surprises are not welcome in any business, less so with early-stage businesses.

 

A good investor in your business is gold, and a bad investor is a potential company killer, so be careful, but be open to sharing your equity with key staff and investors.