What happens to your business when you accept an investor is dependent on the type of investment and the investor. Investments can take different forms:
- Debt or loan – this is similar to bank financing where the company records the liability and pays interest on the loan amount. If you have bank covenants, then you need to consider the effect that this new debt may have to ensure you are not negatively impacted with the bank
- Equity – this is where you are providing ownership in the company and it will generally take two forms:
- Common shares – any future value in the company will attribute to these shares so as the company grows, the value of these shares will increase. As a result, when you bring in an investor by providing these type of shares, you need to realize that you are giving up a portion of future growth in value.
- Preferred or special shares – these shares tend to be a fixed value share so future growth does not attribute to these shares but they retain their initial face value based on the face value of the shares.
For example, if someone buys $1,000 of preferred shares, they will always be $1,000 even if the company doubles in value. This type of share will generally have a fixed dividend amount attached to it to provide a rate of return to the investor.
Other considerations when you bring in an investor include:
- What rate of return does the investor want or expect? Is that rate of return achievable?
- Does the investor want to have a vote in the affairs of the company?
- Does the investor want to be active in the company or just be a passive investor?
- What reporting of financial results does the investor want (e.g., monthly, quarterly, annual)?
- Does the investor expect audited financial statements? If so, this could increase your compliance costs and needs to be factored into the investment strategy.
The above just starts to highlight some of the considerations involved.
If you are interested in learning more about adding an investor to your business, please contact Greg Clarke at (905) 633-6323.