I can’t write without mentioning that somewhat awkward, somewhat shocking, somewhat moving star-studded Oscars event. There were some, well, memorable scripted (and *unscripted*) moments.
One truly happy surprise was the best picture winner CODA (child of deaf adults) – the first streaming service movie to win Best Picture. Apple’s foray into Hollywood glory is showing how businesses can go beyond money-making endeavors to truly make a difference.
And that’s something I like to talk about all the time – how a business (of any size) can impact the people around them.
One way a lot of businesses are doing that very thing right now? Pulling out of doing business with Russia. Although, with US sanctions in place, it’s less of a choice and more of an imperative now.
If your small business somehow has connections and trade through Russia, you’ll want to seriously consider taking some basic steps to investigate and confirm you’re not falling afoul of the complexities of these sanctions.
That’s something we can talk through. Just get on our schedule:
Now, some other complexities you’ll want to examine are taking on investors in your Knoxville small business, and that’s what I’m discussing today …
How EDH Tax Solutions Handles Investors in Small Business
“The secret of creating riches for oneself is to create them for others.” – John Templeton
Everybody loves money. In your small business, you’ll take all you can get, right?
Investments in your company may seem like a can’t-be-beat gift. But taking on investors in small business means a lot more than skipping to the bank to cash a check – it means facing some hard realities about your business.
Your plan, their fine print
After a few down years, venture capital is booming again, especially for tech and large companies – but don’t mistake “VC” for other kinds of financing that your small business might attract. Get your terms straight from the get-go – and get your financial and legal professionals involved, too.
The other thing to get together as completely and clearly as possible is your business plan – it’s your best tool to sell a would-be investor on the bright future of your operation.
Handling an outside investment in your company is going to get off to a much more solid start if you’ve done the work and established some off-the-track records to back up the rosy predictions in your plan.
Let’s assume you’ve done your searching – and vetted your would-be investors … – and you’ve got an investor ready to go. Take a breath first. Investing has a sort of mysticism in business, but in fact, it’s just like any other kind of deal you negotiate.
An equity investor, for instance, usually puts down a fractional sum of money based on the value/profit of your company. If your operation is worth a million bucks, for example, the equity investor plunks down a hundred grand for 10%. Not too complicated.
One major question: Does your investor expect a return based on your profit or your revenue? The latter may mean regular repayment by you whether your business makes money or not. Get this clear with your investor upfront, and if the deal is by revenue, get something in exchange for this tougher deal.
When your stock is up
As a symbol of investment, stocks are becoming a familiar tool: More than half of Americans, for instance, say they own some kind of stock. So let’s say your taking on an investor in small business looks like buying stock in your company. Your next question is: common or preferred shares?
Common: This says your investor has a sliver of ownership in your company and says that the investor has a claim on profits (aka dividends) and voting rights. Most stock that’s issued is common stock.
Preferred: Preferred stock requires more care on your part. This holding operates under a different set of rules than common stock, and even though they come with no voting rights you have to be careful how much control of your own company you hand over via preferred stock.
A couple of other terms it’s good to know:
Anti-dilution: We mentioned how stock gives your investors a slice of your pie. Suppose everything works out, your company takes off and down the road, you decide to issue more stock to more investors? That “slice” your original investor got will consequently shrink – unless they insist upfront on anti-dilution protection.
In the most advantageous (for them) version of this, an investor will in the future be able to buy enough stock at its lowest-ever price to maintain their original percentage of control in your company (aka “full ratchet”).
Naturally, you might not want to live under that condition forever – not to mention it might erode your control over your own company. This is one scenario where you have to be a hard-nosed negotiator right from the initial investment: One condition you might insist on is that the investor is welcome to buy additional shares someday, but at a price closer to the fair-market value then.
Covenants: These are basically promises from you to investors on how you’ll run the company. Some can be quite detailed, from your financial planning to your insurance. Investors commonly ask for them, so don’t be alarmed. Also, don’t be quick to sign off on something you can’t, or don’t want to, deliver.
Look ahead to your end game
Time to be brutally honest: Only about one in four small businesses last 15 years. It isn’t always bankruptcy. Sometimes owners just want to move on and stick out the For Sale sign.
Investors in small business aren’t just going to evaporate when it comes time to sell your company or, heaven forbid, go out of business. Investors may insist up front that you set up a liquidation preference – who gets what in what order if you can’t keep the lights on.
Two points: Get any investment deal in writing – and never spend against promised investments. Seems obvious, we know, but you’d be stunned how often one of these becomes a real problem.
We’re tax experts but we can still help you examine investments in your Knoxville business. We’re always here for you:
On your team,
EDH Tax Solutions