3 Tips To Help Your Small Business Successfully Take On Outside Investors

Running a small business requires a lot of capital. You can burn through your initial investment pretty quickly as you work to establish your company in today's competitive market. Taking on an outside investor can be a simple and effective way to infuse your small business with more money.

It's important that you work closely with a corporate transaction attorney to protect yourself and your company as you accept an outside investor's help.

1. Structure the Deal Properly

A corporate attorney can help you structure any deal you make with an outside investor to protect your interests in your small company. Two of the most common types of outside investors include an equity investor and a debt security investor.

An equity investor will receive payment only if your company generates a profit, but a debt security investor must be paid regardless of the profitability of your business over time. Carefully consider which deal makes the most sense; then work with your attorney to draft the appropriate paperwork.

2. Identify the Type of Shares Exchanged

Whenever an outside investor gives money to a small business, he or she is essentially buying shares in the small business. It's important that you specify what type of shares the investor will receive before you complete any transactions.

Common shares will keep you and your investor on equal footing. All common shares hold equal weight, so voting will be based on the number of shares each shareholder possesses.

Preferred shares will give your investor a disproportionate level of control in your company. Be sure that you specify you are providing common shares in return for an investor's money.

3. Identify Liquidation Preferences

Although you may not have any intention of selling your small business, it's important that you have a plan in place for the sale of the company before you take on an outside investor. The liquidation preferences outlined in your investor arrangement will determine in what order and how you and your investor will be paid in the event of a sale.

It is not uncommon for investors to request that they receive at least their initial investment (and then some) before any other shareholders are paid out. Be sure that your attorney carefully reviews any liquidation clauses included in the paperwork used to secure your deal with an outside investor.

With the help of an experienced corporate attorney, taking on an investor can help you gain access to the working capital you need to grow your business.