There isn’t a week that goes by that I don’t have several Inventors contact either asking if I would like to invest in their idea or can I direct them to someone that would invest. The thing that troubles me is the lack of understanding of what they are asking and what it will require. I have listed some questions and information below that you need to consider before asking for an investment. Can you tell me any other questions you would ask or information you would want if you were the investor?
1. Not knowing how much they realistically need in the form of an investment to get their product from idea to the store.
2. Not knowing the value of their product so they can break the investment down into percentages. The Investor will need to know what percentage of the product/company they will own for their investment. Example: Does a $50,000 investment get them 10% of the company?
3. Not having a business plan detailing how they plan on spending the money once they have the investment.
4. What ROI (return on investment) the investor can expect and how soon after the investment can they expect to see a return?
5. Will you need more than one round of investment money?
6. Do you have a distribution network for your product?
7. Do you already have other Investors?
8. Do you have a working model?
9. What protection do you have for the idea, if any?
10. Who are your competitors?
11. Do you know the regulations for taking an investor’s money for your state? (some states have limits on what can be invested and the person investing has to have x amount of worth before it is allowed)
12. Do you know how to administrate the shares certificates?
13. Will you be an LLC or Corporation?
14. Who will be on your board and what responsibilities will they have?
15. Do you have an exit strategy and what is it?
16. Are you selling strictly online, brick and mortar, combination of both?
17. Will your product sell local, regional, seasonal, national?
18. Are you compliant with the laws and regulations of your state for taking investments from outside parties?
19. If you are licensing it what is the lowest percentage you will accept?
20. Will you be asking for an advance and how large of an advance?
21. Will investors be reimbursed based using the net or gross income?
22. Will payment to investors be monthly, quarterly, annually?
23. Does the Investor add value other than just their money? Do they have contacts that could increase your companies value, get you more business, expand your distribution, lower your manufacturing costs, etc?
24. How has your companies money been spent up to this point? Are you frugal with your money or make poor choices wasting money? Investors want to see you use their money wisely and not spend it on items that do not add to the value of the process.
Another point about investors that Inventors need to consider is the fact that once they invest their money a number of them take a hands on approach to the company they invest in and want a say in the how their money is used to protect their investment. And your vision and theirs may not be in sync which can cause conflict in the business. So you need to have a clear understanding between you and the investor what their role is and your and their expectations before you take any money.
Have seen an Investor show up to the business and direct employees to do other tasks than the boss had assigned them. The employees were confused on what to do because they knew the person invested a large amount to the business and did not want to make them mad. The Owner of the business had a habit of leaving others in charge as he went out foolishly wining and dining his friends trying to impress them on the Investors money. The Investor ended up pulling out of the investment demanding all his money back. The owner ended up having to liquidate a majority of the company assets to refund the Investor. He tried for three months to get other Investors interested in his company but the original Investor made a point of letting other Investors in his circle of friends that the business was a bad investment. The business went bust a couple months later due to lack of funds.