Tim Berry

2 min. read

Updated December 3, 2024

As an entrepreneur seeking investment, it’s crucial to understand that the power of investors lies in their ability to say “no.” This rejection can stem from various factors, but ultimately, investors prioritize generating returns and achieving liquidity over merely holding a stake in a company.

Reflecting on this during a flight to Oregon, here are some key considerations to bear in mind:

• •
  While attracting naive individuals, such as friends and family, to invest in exchange for small ownership percentages might seem appealing, it often leads to unfavorable outcomes. These investors may lack sophistication and hinder future growth by interfering with professional investors.
• •
  Seeking investment from external sources is best suited for scalable, defensible startups with proven management teams and a clear exit strategy within a few years. If your venture doesn’t align with these criteria, consider revising your business plan to minimize the need for external funding.
• •
  When negotiating equity, ensure that outside investors collectively hold a majority stake to prevent potential conflicts regarding selling the company in the future. Investors only realize returns upon exit events, not during the company’s operation.
• •
  Avoid distributing equity to individuals who may not contribute meaningfully to your business in the long term. These small ownership shares often create complications as the company evolves, either by restricting employee incentives or by maintaining unwanted obligations.
• •
  Remember that valuation and equity allocation are intrinsically linked. Be prepared to justify your company’s worth to investors when offering ownership stakes. A clear valuation strategy is essential for successful fundraising.