Investor funding has the main advantage of funding that doesn’t have to be repaid. Any dividends payable to a shareholder will wait until the business is solvent, profitable and the cash flow of the business allows the payment of dividends. It is therefore a desirable option to consider in the early years when the business is still in the growth phase.
The disadvantage of this however is that a portion of the control of the business will have to be given up by way of shareholding. The investor will also have the right to share in all future profits that the business will generate. In the long run this may prove to be expensive funding as the business grows strongly with good cash flows.
Get it all on paper
It is important that an agreement is drawn up before the business is started, to ensure that everyone understands their expectations and responsibilities upfront. It is worthwhile consulting the relevant experts to assist with this.
A shareholders’ agreement can outline the contributions agreed on and the returns entailed.
Depending on the investment amount, you can look at giving an investor a share of between 20 –30% of the business. The investors’ fund should preferably have no fixed term of repayment and should be interest free, as investors will share in future dividends/ profits that the business will generate.