How to Read Warning Signs when Raising Capital

All businesses need capital to survive. Sometimes, like when you start a business, you might need an investor to lend you money to get things going. The key is to give your investor options while still having control over your business. Here are some warning signs you might see while raising capital.

Instructions

Difficulty: Moderately Challenging

1. Don't work with an investor that is unwilling to negotiate. An investor who gives you a take it or leave it attitude is a big warning. A good business deal is one where everyone walks away satisfied. If an investor likes your business and your personal business skills, then they will be willing to bend a little with you.
2. Be wary of provisions that limit your flexibility with getting capital from other investors. For example, any clauses that prevent you from holding a public offering before an investor sells his stock limits your ability to do what's best for your business.
3. Stay away from agreements in which you owe your investors additional stock without their buying it. Some contracts include clauses that give investors free stock if the stock ever falls below the price they bought it at.
4. Think twice about agreements that require you to only work with one set of investors. If your business relationship is good, you and your investor will want to work together the next time you raise capital. However, you shouldn't make yourself contractually bound to give your current investors first dibs on new stock.