No matter where you are in this process you’ll need to think carefully about how to keep investors on side and content. Preparation is key, so this should really start before any investors come on board.
Written by: Debbie Austin
It’s a delicate act of running your early stage business, staying the strategic course, maintaining control while delivering communication and results that incite confidence from your backers. They’ve placed real belief in you and your business, so you should nurture these connections to form long term relationships that will ultimately really benefit your business.
The question is how given running an enterprise means a plethora of tasks that can result in communication channels slipping off your agenda. In our experience it’s all too easy for that to happen resulting in investor disengagement and frustration. We’ve put together these tips to help you manage these relationships, to drive shareholder fulfilment and ensure you remain in control of decision making..
1. What kind of stake in the business are you offering?
For those just embarking on the journey of raising finance, the vital question is what type and class of shares are you willing to offer investors? Are you aware of these and how to select them based on your plans for the business?
Ideally you’d identify from the outset in your business plan, the need for investment and when it will be required. Then make sure you work with your accountant to understand if tax breaks such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme are applicable. These could potentially be applied to help you in your pitch to would be investors.
If you already have investors on board, you may need to revisit exactly what you offered them with your accountant or lawyer. You can make changes to share capital after incorporation if needed. However, this requires extensive planning and could prove expensive as it requires a redrafting of the legal documents that govern the ownership and rights in a limited company.
2. Understand your shareholders rights
If you don’t have a financial and/or legal background then you’ll need to take advice as to exactly what your shareholders legal rights entail. This is particularly vital when considering scenarios where you’ll need to allocate investment into the business or key decisions need to be undertaken as to the strategic direction of the enterprise.
Generally shareholders rights refer to their specific privileges that are governed by the laws of the country your business operates out of. Depending on the articles of association, these can include the right to:
• Share in the profitability, income and assets of the business
• Influence and/or even control over management selection
• Purchase newly issued shares before other new investors
• Vote in general meetings
3. Take control and manage the relationship
Early on, be sure to manage expectations by providing a clear vision of where you are going and some form of timeframe for getting there. Doing this provides clarity and ensures everyone is on the same page as to the direction of travel for the enterprise. You need them to buy into what you see as the path to growth and possibly even an exit plan if you have one.
Draw upon your accountant’s experience of having done this with other entrepreneurs. They can provide you with guidance on when and what should and possibly shouldn’t be shared with investors. Setting clear expectations from the start will likely save time, effort and frustration of having to revisit such matters later down the business path.
4. Communicate effectively
The building blocks of a mutually advantageous relationship are formed through consistent communication. It may seem like common sense but unfortunately the obvious things all too often get lost in business. At its simplest this is a case of providing investors with regular management reports and keeping them informed as to financial performance and progress towards set goals.
Again, work closely with your accountant to leverage their knowledge and experience of working with other clients, in helping you prepare reports that your investors will want and need. This combined with bi-monthly, or quarterly meetings should provide your backers with sufficient insight and a sense of involvement in proceedings.
Doing all of this will help ensure you don’t lose control of the business you’ve worked so hard to build. Ultimately you live the day-to-day of your enterprise which means you know it’s inner workings best. Investors will often recognise that so while they will provide their opinion for you to consider, often many will want you to make the final decision as the owner manager.