Venture Capital Risks: As a Business Owner, Don’t Give Them Your First Born

Everyone loves to hear of a business gamble that pans out big time.  As a business manager for entertainers, I have worked for some big names.  Over 25 years ago, I learned from my mentor that he started as a TV lawyer in the early 1950s. The field was wide open and attorneys not only tested the legal waters, but also their billing practices.  My employer started with an unemployed writer who needed some contract negotiations.  He didn’t know what to charge the writer, so at this early stage, he took 10% of the writer’s new production company.  My mentor charged for his services soon after that, but in the 1980s he cashed in his 10% holding when the writer/producer “went public.”  The unemployed writer had evolved into one of the biggest names in television.

The Don Charlton article, The Most Important Word When Raising Money for a Small Business, reminded me of that conversation.  What is a start-up willing to bargain with an angel investor for cash or services?   Mr. Charlton stated, “The best piece of advice I can provide is one that was given to me recently: change your mindset from ‘give up’ to ‘trade.'”

Now, this is good advice, but how does one wrap their arms around “trading?”  I’d like to give his advice some teeth:

1. Always use a lawyer:  This can be costly, so try to negotiate a ceiling to the legal fees.
2. Exit plan for your angel investor:  Set a time limit with some required milestones that would “cash out” the angel investor.  For example, if the company’s net worth reaches $10 million by five years, the investor will receive 30% of that amount or more if valued higher.
3. Create multiple classes of venture capital ownership: If you use an LLC, as oppose to an S-corporation, you can create different levels of ownership along with different rights.  Make your class of ownership different than your angel investors with a bigger upside.

We are approached weekly for our expertise in business plans and strategic planning.  We see so many new owners who are looking for angel investors.  As a new business owner, lay out the possibilities like those I stated above.  Your attorney can counsel you as to the application to your situation.