What Startup Founders Seeking Equity Investment Need To Know: 5 Deal Killers

Almost every startup founder looks forward to the day they will be able to find investors to help fund the explosive growth of their enterprise. Sadly, some of the mistakes entrepreneurs make in the earliest days of their business all but ensure they will never see significant financial support materialize.

The following “deal killers” are mistakes business owners should avoid, or repair, before they look for equity investment.

Fully vested founders who are not integral to the company’s value are a huge stumbling block for almost every early stage investor. If you give a lot of your company away before it is fully formed, and before everyone’s value is proven by the work they have done in the current enterprise, then you don’t have much business sense. Ownership of a company needs to be earned by each founder over a period of years. If you’ve configured your company without following this rule, you may need to establish a new enterprise that can buy the assets of the old one so the terms of equity ownership can be rewritten.

Significant debt unsupported by revenue will drive almost any rational investor away. A good startup grows organically. It starts small, proves its value by acquiring some customers, perhaps borrows a little to grow even larger then proves its value again by increasing incoming revenues. If your company has been living off its credit line because you don’t have a product people want to buy, an investor will not volunteer to rescue you. Investors recognize that debt compounding in a company without a viable product is a death sentence. If you have this problem, you should probably stop looking for investors and start looking for buyers. You may be able to sell your company or some of its assets to get rid of the debt. Failing that, bankruptcy has to be considered.

Founders in conflict almost guarantee a company won’t find outside investment. No investor wants to buy a front row seat to a fistfight. If you and your co-founders are at odds, get mediation before you look for outside funding. Negotiate exactly how and when one or more founders will leave the enterprise, and how much they’ll get if the company receives investment or it is sold. By resolving this kind of organizational problem before an investor enters the equation, a startup demonstrates they are ready to move forward rather than fight old battles.

A company with a shrinking market will struggle to find any outside support. You may have started your business when there were lots of customers for what you had to sell, but times change. You may hope, belatedly, that with outside funding you can repurpose the assets you’ve created to meet new needs. That’s a very hard sell to an investor because they have to wonder why you didn’t pivot sooner. The answer usually has something to do with running out of money faster than expected and that makes investors question your ability to run a business at all. Startups are most attractive when they are selling solutions for fast growing markets. Make sure that’s what your company is before you start looking for investment.

Bad books are a death knell for any enterprise looking for money. You may have started your business in your garage, and your accounts receivable may have amounted to petty cash, but you still need to have books created by a professional accountant that stretch back to the day your business was founded. Good financial records make clear who owns what, on what terms, and what outstanding obligations remain. They document whether taxes have been paid, where revenue has come from, and how much everyone has really been getting paid. It doesn’t cost much to hire a CPA to clean your books up, and a good one will help you make sound decisions about how to structure things financially in a way that’s attractive to incoming financial partners.

Every early stage investor understands they are taking a risk with their money, but they want any losses they take to be related to decisions the company makes going forward not mistakes the founders have made in the past.

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