How to retain ownership and control while bringing on investors
By Arnold Macalintal
Your food or beverage business is going well, but you’re thinking it may need a cash infusion.
Taking on investors can ease your financial burden, but at what cost? You’re the one with the dream, the plan and the sweat equity invested in the business, so why should you cede control to outsiders?
Here are some tips for getting the cash you need without losing the ability to run your business your way. But also keep in mind that an involved investor isn’t always a bad thing.
- Keep some leverage. Tighten up your financial projections to give yourself as much warning as possible when you will need to find additional funding sources. And be conservative, planning ahead for the missteps that you will inevitably make along the way. That’s easier said than done, but it’s critical to avoid a situation in which you’re in a serious cash crunch and you need money now. When that happens, you lose leverage and the ability to negotiate for the best terms.
- Explore alternatives. Before figuring out how much control you must give up to outside investors, be sure you’ve carefully considered other funding options. It’s difficult for young companies to get traditional bank loans, and the interest payments add yet another expense, but the option is worth exploring. Factoring — selling your accounts receivable at a discount for immediate cash — is another option. Also consider issuing convertible debt. In that scenario, you obtain immediate funding, retain control for now and do not yet need to set a valuation for your company.
- Try to sell nonvoting shares. Some money sources are more interested in investing in you than in the business. Professing no knowledge of or interest in the food or beverage business, they’re more than happy to let you carry on. If these uninvolved partners agree to buy nonvoting shares in your company, give up some equity without losing control of your business — a win-win solution if you can find these investors.
- Lose equity, find a mentor. If all else fails, know that giving up some control doesn’t have to be a bad thing. The secret is to find an investor who’s got more to offer than just deep pockets. Maybe you’ve met a serial entrepreneur, someone with a track record for business startup success and a willingness to share the wisdom. Even better, you find someone with experience in the food or beverage industry. When that happens, think of it as exchanging some loss of control for consultative services from an expert. Your new partner could be the best resource you’ve ever had.
When the time comes to find investors of all kinds, explore the crowdfunding option online at sites such as CircleUp, which specializes in consumer-product companies. And always talk to your accountant before making any financial decisions.
Arnold Macalintal is a manager at Wiss & Co. LLP. Reach him at email@example.com.