Should you accept outside capital to grow your business?

Key points

• Ways to attain outside investment
• Weighing up the pros and cons of accepting outside investment

Accepting outside capital (such as where someone invests in your business in return for a percentage of the shareholding) can be exciting because it often offers cash that you can use to grow your business.

But it’s important to weigh up the pros and cons of accepting investment before you begin down this path.

Ways to attain outside investment

Whether you’re a new start-up or an established business with growth ambitions, outside investment can be attained through a variety of means.

You can raise money through:

• You and any of your business partners or shareholders who are willing to invest more money into the business
• Friends and family who may be interested in supporting your business
• Angel investors who are usually high-net-worth individuals that like to invest in small start-ups and may have industry-knowledge or may be personally interested in your business
• A venture capital firm or managed fund that raises money from a number of people, then invests these funds in potential high-growth businesses
• Government or other funding —sometimes your business may qualify for some form of assistance or grant
• Loans or other financing arrangements provided by banks, other financiers or private lenders

1. Pros of accepting outside investment speed

You may be able to take your business to its next stage faster. By accepting outside capital, your business could move forward immediately without having to rely on building up a cash reserve over time.

The time it takes to access funds could matter when you want to move quickly, such as when you want to develop products faster than your competitors, or increase your market share faster.

2. Ability to tap into external expertise

If an investor has industry knowledge specific to your business, an advantage of accepting their investment could be the expertise and advice they bring with them.

For example, they may be able to help you with:

• New channels to market to or introductions to new clients.
• Access to other technology or processes that they have knowledge about.
• Partnerships or strategic alliances with other businesses they’ve invested in.
• Management of your business, especially if you need to employ more people and haven’t had experience in managing layers of employees.

Cons of accepting investment

The obvious disadvantage of accepting outside investment is that you are ‘sharing’ your business.  This can mean having less control over your business day-to-day and, if things go well, having to share the rewards.

1. Loss of control of your business

If you seek outside investment (e.g. from family members, angel investors or venture capitalists), you may lose some control of your business. While some investors can be ‘silent’ (meaning they want little direct involvement in the business), often investors will want to have a say in how you run your business in order to protect their investment.  But the level of control you lose is up to you to negotiate, and depends on the terms that are agreed between you and the investor when they buy into your business.  For example, if your business is a company, in exchange for the investor providing money to the company, they may want the ability to make or influence decisions in relation to the company (e.g. they might want the power to appoint a director, or cast a certain number of votes in relation to shareholder decisions).  If the investor becomes a shareholder, they will have rights as a shareholder as well.

The level of control an investor wants will usually be determined by the amount of money they are going to invest.  You will need to consider how much the capital is worth to you and the business, and how much control you are willing to give up in exchange for it.  You should speak to your lawyer, accountant and financial advisor about the options available to you.

A loss of control could also result in you having less freedom to set your own salary or make decisions in relation to profit drawings or business perks, as an investor may have a say on those decisions.

2. Splitting the rewards

If an investor is putting money into your business, it’s natural that they will want to receive a portion of the business’ future profits as well. For example, if an investor was proposing to buy 50% of the shares in your company, they will usually be entitled to receive 50% of the dividends paid to shareholders.  Any profit the business is distributing to other investors could reduce the amount you get.

Overall, accepting outside investment carries benefits and risks.  Before you consider accepting outside investment, you should speak to your lawyer, accountant and financial advisor about the options available to you, and how you can best protect the interests of you and your business.

Next steps

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