Don't Assume Investors Are Your Friends

Don't Assume Investors Are Your Friends

It all seems so harmless... A team of entrepreneurs turns to outside investors to help them take their new and growing business to the next level. In exchange for funding, the investors want to have a say in some of the business decisions. To these cash-strapped, inexperienced business owners, it sounds like a good deal, a real win-win on both sides. They'll get the money they need as well as help with managing the business, and their investors will grow their wealth.

Unfortunately, it doesn't always turn out that way.

Unscrupulous investors can gut out a promising business in the pursuit of a good short-term ROI. For every good investor out there interested in funding a startup, there are many bad apples, and bad investors are a lot like bed bugs- once you get them, it's very hard to get rid of them.

A Tale of Diverging Paths

When entrepreneurs turn to investors for funding, some naively believe that they are entering a partnership where both sides are on the same team working together and going in the same direction. That may be true when business is going well. But the real goal of investors is getting a good return on the capital they laid out. So, when business isn't going as well as planned, investors are tempted to put their own self-interests ahead of the interests of the business. In other words, the majority of investors are inherently at odds with the business owners they are supposedly helping.

Many first-time entrepreneurs learn the hard way that they are not just giving up equity ownership of the business when they take on an investor, they may also be giving up control of the company they worked so long and hard to build.

Related Article: 4 Factors to Consider When Choosing an Investor

3 Keys to Taking On Investors Without Losing the Business

Here are three vital things entrepreneurs should consider in order to protect themselves and their business when seeking an outside investor:

1. They need to know what they want.  Entrepreneurs have to be crystal clear about their goals for themselves and their business. Are they hoping to sell the company to a big corporation a few years out or is their business a long-term project? The answer will affect the kind of investor relationship they are looking for.   

Related Podcast: Why First-Time Entrepreneurs Are Growth Hacking Failures

2. Second, they need to know how to protect what they want. This is where good negotiation tactics come in. These tactics begin and end with a detailed, thought-out investor agreement and a good lawyer whom they can consult with.

3. They need to know how to actualize what they want. This means two things: 1) developing a good game plan; and 2) giving that game plan the time it needs to happen. Many entrepreneurs make the mistake of giving up too much of their company too early on, and that often backfires. Entrepreneurs can find themselves working in a company they built, but have little to no control over it. It's usually better to give up equity in stages as the company grows and gains value. This approach may take a little longer, but it allows the founders to steer their business in the way they want to.  

Related Article: How to Get Angel Investor Agreements Using Win-Win Deal Structures

The key takeaway to remember is that while entrepreneurs are busy building a vision, investors are busy building a return. Sometimes these goals meet; sometimes they are opposing forces. Entrepreneurs need to be aware of what they are getting themselves into- what they stand to gain, versus what they stand to lose- before they sign the dotted line.