How Much Control Should An Investor Have Over Your Business?

The question continues:

The investor wants the following provisions, and is investing $70k for 15% of the company:

  1. Approval of any compensation paid.
  2. Ability to jointly approve new board directors.
  3. Ability to veto any expenditures not related to the agreed upon business plan.

As further context, he wants to invest 70k for 15% of the company. That amount will cover hosting, product development for iOs, Android and an online administrational platform. Also important to note that he is investing pre-seed therefore there is a lot of risk involved from his part and the same time a huge help for me, since it’s super hard to find investment at this stage.

 

My answer:

The short generic answer is: the inverse of your projected ability to execute.

Meaning, you can haggle over these issues until the cows come home, but if you are consistently demonstrating you are the best person to drive the company’s success of upside, the need for stringent conformance to these terms will dissipate. If you are not (and someone else may take your place), they are merely downside control; protective measures to prevent the company from bleeding cash and control when the shit hits the fan.

The three terms you listed are quite reasonable (considering the stage and type of investment I imagine this to be) depending on how one would set up the cap-table, the voting rights and specifically the operating plan, which should list your prognosis for expenditures related to product development, marketing, sales, etc.

Your investor seems to communicate an alignment with your vision. His/her protections are merely protections. There are few viable reparations to your investor in case you do not perform. Focus on the trajectory of upside rather than on the protection of downside.

That said, I would limit the incidental expense approval to above a certain amount, say $5K. To avoid the otherwise daily approvals.

Communicate with your investor frequently, and go over your expenditures and milestones at least every month in the beginning. Set up a board meeting at least every quarter with a formal presentation of progress, attorney present. Deliberately build the transparency that cements trust with the investor. Be honest and be real, even when problems arise.

No smart investor will hold you to the rigid trajectory of downside initially conceived, building startups is a rocky road, and authentic trust will iron those issues out.

 

To discuss this article, book a free 30-minute video-conference with Georges.

Get new articles like these in your inbox, collated once per week.

Click to access the login or register cheese