At the crossroads of yes and no
As a small business owner that caters to small business owners, I can say with extreme confidence: Yes! Yes, absolutely turn down any investment unless the following three things are true:
1) Do you have a clear plan for how to spend the money?
Investors aren’t banks: they’re not in it to get a few percent back. They’re investing in you to get a massive return, and they expect you to generate that return by spending the money they just gave you. This means from the moment you get the cash, it’s burning a hole in your pocket – so if you don’t spend it fast on *something*, your investors will get angry. To avoid that, makes sure you know as clearly as possible how you’re going to spend that money, and make sure your investors understand that up front.
That said, in practice you probably won’t be in a strong enough position to really make use of that advice. Rather, it’s likely you’ll likely be so desperate that you’ll say anything to get it, and investors are surprisingly happy to turn a blind eye. So as fallback advice, just be sure to write down your spending intentions even in the most general terms, and email them to your investors in a way that is non-confrontational. This gives you *something* to work with in the event there’s disagreement down the road, which will almost certainly be the case.
2) Is it enough investment, without being too much?
There’s a Goldilocks zone to how much you raise.
- Don’t raise exactly 1x what you need, as everything takes longer and is more expensive than you expect.
- Don’t raise less than 1x with the intention of going back for more, because raising is extremely distracting and it gets harder to raise the next round if you don’t perform.
- Resist the temptation to raise more than 2.5x what you think you need, as investors will press you to spend it — and once gone, it’s gone.
Rather, raise enough to get the job done with a reasonable cushion against the unknown, but not so much that you get too comfortable and start making stupid decisions.
3) Do you fully appreciate and accept the strings attached?
Let’s be honest, investors are more savvy than you when it comes to this sort of thing. You sell coffee: they sell money. You know more about coffee than them, but they know way, way more about money than you. Just as you could pass off day old coffee on most customers without them realizing, investors have a thousand tricks for how to tie all sorts of clever strings to the money they offer you. Accordingly, make sure you understand every little term in the contract, and have it reviewed by a competent attorney. They’ll say “oh, don’t worry about that; that’s just boilerplate and we’d never actually do that.” Assume every single term will in fact come to be, and get comfortable with that possibility. If you can’t, walk away and find someone else.
Taking on an investor is like hiring a boss; make sure hire well because it’s a decision you can’t undo.
Expensify Blog 