How much should I offer my investors to strengthen their confidence in my business?

I am starting a business with investor/sponsor support.

I am new to understanding investor returns. How much of a percentage should I offer my investors to strengthen their confidence in my business?

Is there a section on your site that can inform me about the Do’s and Don’ts with my investors?

There is no ‘one size fits all’ answer to this question.

It depends on the type of business, the amount invested, the potential for growth, the opportunities to sell the business…etc

In general, investor returns will come from three sources:

1. Interest on loan funds (if investment is by way of a loan).
2. Dividends – paid out of operational profits in proportion to investor equity (share) holding.
3. Capital gain – derived through the sale of the business (in proportion to investor equity holding).

Firstly, you have to answer which of these sources will be the prime return source for investors.

If source one, you will have agreed on an interest rate as part of negotiating the loan. Otherwise, your expected business results (articulated in your business plan) will define the return investors can expect.

It then boils down to what proportion of your business (percentage) the investors are buying and therefore, what proportion of the profits and/or sale price they pocket. This is a risk/return equation which can only be determined in negotiations between a willing buyer (investors) and seller (you).

In terms of “Do’s and Don’ts” there are so many… the simplest reference point to start with is looking through my blog postings for the last year.

As a matter of principle the most important thing to get right when taking on investors is that your interests, and those of the investors, must be well-aligned. Most issues that come up are one way or another related to this guiding principle.

Simple examples:

If you want to build a business and hand it on to your children then that’s what your investors should want… If they want to build the business up and sell it for a capital gain, then that’s what you must want… If you want dividends paid out and the investors want profits reinvested to grow the business – you have a problem to resolve… If you want to increase your salary as the business succeeds then the investors should be fine with that… If investors want to expand your business interstate/overseas, then this should be your objective as well, etc.

All of these issues present opportunities for alignment or dispute – depending on where you stand.

Whatever the nature of your business, think through all of the potential fundamental issues confronting you and make sure you see eye-to-eye with your investors.

The rest is detail…

Cheers,
Doron

Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.

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