Onboarding is a management term dating back to the 1970’s and also known as organisational socialisation. A specially designed programme ensures that the new recruits get to know the company, its culture, their colleagues, the IT systems and so forth. You have probably given your own extensive thoughts to the onboarding programme for your company. Getting it right helps your new employees find their ground quickly.
Your most expensive employee will ultimately be the investor that invests in your company. In exchange for their financial investment, the investor will wish to retain a portion of the shares in your company. With this money you should be able to create further growth for your company, making the pie – which you now have to share with the investor – bigger. What thoughts are given to the organisational socialisation of your potential investors?
As with all transactions (and coins for that matter) there are two sides involved: the buyer and the seller, the investor and the entrepreneur. In line with this distinction, this blog post on onboarding an investor is also divided into two parts. Part 1 aims to bring insight from the perspective of an entrepreneur on what you can request from an investor, besides their money. Part 2 obviously covers the reverse and brings understanding for an entrepreneur on what the investor may request when investing.
First of all, a quick distinction on the types of investors. In very broad terms, investors can be divided into investors with dumb money and investors with smart money.
The label on the first group says it all, these investors only invest money. They are usually not looking for any major form of control or influence. They merely wish to secure their investment and pray for a large financial return on their investment in the near future. Popularly, this group is also referenced as the dentists. Reason being that in general dentists have not completed a degree in business or finance but will have earned a fair amount of money with their trade, which they are now looking to invest in something other than the stock market, real estate or bitcoins. Therefore, a note of warning if you take on a dentist as your investor, keep him or her away from your company’s strategy as well as the preparation and execution of your business plan.
Now, the investor with smart money is an investor who can do things for you and for your company. Besides money they can bring knowledge, expertise, a network and/or time. And contrary to the dentist, this investor will wish to have more control in exchange for their investment, be it through a seat on the board or voting rights in your shareholders’ meeting. In addition, they will also be willing to advise you and your company.
In your negotiations with such potential investors leading up to their investment, it is key to clearly spell out what the investor will be doing for your company and to which degree or depth the investor will be involved. Dare to dive into to the details, such as:
- Which areas or aspects of your company will the investor be involved in? What result may your company expect from the investor’s involvement?
- How much time will the investor spend on your company? At your offices or remote? How hands-on will their involvement be?
- How often will you meet? What are the possible topics of your meeting? Which topics will not be discussed?
- What does the investor’s network look like and how will they put it to use for your company?
- If you are revising your business plan or budget together with the investor, what will this cooperation look like? Who has the final say in the business plan or budget?
- What happens if the investor’s involvement is not up to par? Or if your cooperation does not work as smoothly as expected?
Laying such questions on the table will bring understanding and manage expectations on both sides. If the investor’s answers to your questions do not sit well with you, don’t be afraid to terminate the negotiations [see note]. At the time of writing this blog post, there is still more money for investing available in the market than there are viable and interesting start-ups and scale-ups to invest in.
Once you have a clear understanding of the investor’s involvement, and which you are happy with, make sure to write it down, preferably in an agreement, making both parties accountable.
A final note of caution: onboarding any investor is a balancing act. The financial investment and investor’s desired control and involvement in your company should weigh up to the piece of the pie that you are surrendering to the investor and potential growth of that pie. It is therefore useful to also understand what the investor may be looking for when investing in your company, which will be discussed in Part 2 on ‘Onboarding your most expensive employee.’
[Note: it is advisable to enter into negotiations with an investor on the basis of a term sheet or letter of intent, which sets out parties’ initial ideas on the investment and is subject to confidentiality. This document also sets out the playing field for the negotiations, which eventually may result in a transaction / investment. The term sheet or letter of intent should state that it is a non-binding document and that parties have the opportunity to terminate the negotiations.]
Quirine is one of our Wyse thinkers here at Wyseminds and Part 2 of her blog post will be shared soon. In the meantime, you can explore another of Quirine’s blog, ‘Investing versus Covid-19’ here.