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How to find the right investor

Wednesday, 7 October 2015

Entrepreneurs, start up businesses and businesses desperately looking to raise crucial capital may feel that they can’t turn down an offer from an investor, however bad that offer is, and as a result reasoning can go out the window.

If you are looking for an investor for your business it is important that you remember that the relationship between both parties has to be good because you may be working together for many years. Therefore, you should determine what you are looking for in an investor before you seek investment.

Ask meaningful questions
Finding the right investor for your business should be approached in a way that allows you to find out more about their personality, their business history and their experience. To get a better feel for an investor’s background and temperament you should ask questions such as:

  • What experience do you have that is relevant to my business?
  • What do you know about my businesses industry?
  • Have you invested in the industry before?
  • Beyond providing capital, how do you support businesses?
  • Can I talk to previous businesses you have invested in?
  • How do you make decisions?

It may be counter intuitive to interrogate the potential investor in this way, but doing so may reassure the investor that you are not just after their cheque book but value their background and are looking for someone who is a good fit for the business rather than anyone with cash. Remember, the investor may be able to assist your business in more ways than merely investing money in it.

How much equity to give away
Once you have found someone who is a good fit for your business you need to decide how much equity you’re prepared to give away. This is usually somewhere between 5% and 40% and it depends on the amount of investment you’re seeking and what you feel the investor will contribute to the business. You should be very cautious of investors who want more than 50% or a majority stake in your business, especially if they can’t clearly justify why they should have such a large stake. Ultimately, you should base your decision of how much equity is fair, and this boils down to how much value you will be getting from your investor.  But what you should also be prepared to reach a compromise which is mutually beneficial to you and the investor. 

Once you have found the right investor for your business you will need to form a legal agreement between both parties. The specialist team at Rollingsons will be able to draft the terms of an investment or loan agreement and provide you with impartial advice on the legal implications of an investment agreement. We do not give generic investment advice, but instead give legal advice on the rights and responsibilities or investors and investees. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.

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