A Trusted Small Business Working To Protect Your Professional Practice And Your Business

Consider safety nets when working with new investors

On Behalf of | Sep 23, 2021 | Business Law

It may be true that some business growth is luck – being in the right place at the right time. But the majority of lasting businesses are built on a firm foundation with a governance structure, clear goals and a defined growth strategy. All of these items are subject to change, but planning is a constant for any business owner.

But every business needs money. Investors can offer a boost at key opportunities, but it also comes with risk.

The age-old concept that an entrepreneur manages the idea and the execution while the investor writes a check from the shadows is rarely accurate. Investors want something for their contribution, and sometimes this leads to conflict that can derail a business.

Investors enter at different stages

The American dream is fueled by self-sufficiency and, each year, there are nearly 6 million startups across the country. The competition for funding is fierce, and investors hold a bargaining chip. They may demand a share of ownership or certain decision-making rights.

This is often a fair arrangement but bringing a new partner into an established plan carries risk. They may have different goals, management styles or opinions that reshape the brand, organization or product/service. The most significant investor risk comes at startup, which means that many companies will establish themselves, then seek new investors to fund the next stage.

For this reason, the business structure is essential to maintaining order and control. Investor roles need to be clearly stated and how governing bodies such as a board of directors will operate through growth and change. Uncertainty leads to wasted time, money and often litigation. Nobody wins in a power struggle.

Managing new investor disputes

CNBC recently explored some of the challenges that come with new partnerships, using an example where a company brought on a new investor who thought they should go after a new market. In the end, the investor owned a 20% share of the business, which did not grant that authority, but the organization still compromised to limit animosity.

Key highlights are to secure the business structure before any key changes. Additional strategies to protect against blowback from a new investor include thoroughly exploring one’s current network first and building the relationship before an agreement whenever possible.

Always consider damage control

Thoughtful growth is more sustainable than spontaneously riding the wave of the market. It is often beneficial to open the door to new partners, but there needs to be a safety net to limit potential damages if a disagreement threatens the project.