How Investors Can Ruin Your Business

When I had my handbag line I just wanted to be successful.  I wasn’t always sure what that meant….. it did include making lots of money….but I wasn’t sure what the rest looked like for a while.

Once I got some PR and got my products to famous Celebrities, people started to take notice of me.  Magazines wanted to interview me, and producers called asking me to be on E! and Extra.  Don’t get me wrong, that was all fabulous and helped skyrocket my sales…..which made me more money…..which made me feel successful. (Full circle)

But what really made me feel like a rockstar was when investors started poking around.  Now this was an important moment for me…..

I was flattered, but I wasn’t sure it was the right move for me. I didn’t really need their money, but I was enticed with the fact that they’d supply me with a COO who had a fancy MBA from UCLA and who (they swore) was clearly more capable than me since she had a business degree.  Somehow I got caught up in it all and before I knew it, I had 28 small investors and a new COO.

But as you might know, it didn’t turn out to be all glamorous and fabulous….in fact, it was a mixture of my ignorance and circumstance that blew it up in my face.

Unfortunately, I was not very “legally” savvy at this point and just went with the flow and in the end…..paid the price.  I lost my namesake company, the rights to use my own name, and for a while my pride. This hurt the most. 

If you are considering teaming up with investors, be it friends, family, Angels, or VC’s… here are some things I learned the hard way that will hopefully prevent you from making the same mistakes. I am not an attorney…..just someone who experienced and learned a lot over the years. Ask your attorney for advice on this…..just sayin’…I’m not one.

1. First and foremost, get your OWN attorney. Not the one for the company, but your very own who has your interest at heart. A corporation’s attorney is obligated by law to make the best deal possible for the business….not for you, even if you are the owner. I lost the rights to use my own name when I closed my handbag company as the company owned the rights to my Trademark and my bitter investors would not give it back to me. I didn’t have my own attorney.

2. If taking money from anyone, be sure you have a very tight/strong shareholder agreement that clearly states they are taking a risk. Make them sign that page in addition to the main signature page. This saved my butt.

3. If giving shares for sweat equity, be sure the equity equals the sweat. Meaning that you should have a clear statement of expectations and once the expectations are met each quarter (or how ever you measure it) then that amount of shares vest. For example: You are giving someone 16% of your company for XYZ services. They have committed to 2 years of service in exchange for the shares. If you divide the shares in 8 parts then each quarter they vest 2% of their shares. If they abandon you – the vesting stops and you retain the shares. You can also speak to your attorney about the abandoning part as they might come up with a way to get the shares back if they quit too soon. Worth asking. One of my business partners took 20% equity in exchange for sweat equity, and quit a few months in and kept the shares as I didn’t have my own attorney and the corporate attorney did not advise me on this…… live and learn. it sucked.

4. Make sure your shareholder agreement has a dilution clause….that you can dilute. Don’t get stuck not being able to raise more money. This was the one good thing the company attorney did that I could benefit from.

5. Lastly, only take money from investors when it is the LAST LAST LAST possible resort…… use credit cards, get a loan, borrow from a friend and pay them the low interest they are getting now……Investors stink…..they are (usually) only after the money they think you can make for them…. they are business people who choose to invest in you instead of Apple stock…..they don’t want to lose. It’s a lot of pressure. The best investors are the ones who can give you advice, make connections, introduce you to the right people….. the ones who can actually change your life. Look for those….. you’ll be happier.

If you have any specific questions…..feel free to post them below. 

Written by Sarah Shaw