There are two schools of thought when it comes to ways of investing in a new business. Structure is everything, or structure does not matter and you do common stock. Structure in an investment means there is a lot of restrictions and safety lines for the investor, in order for them not to get burned. Common stock investments are nearly string free and very simple. They place a lot of confidence in the entrepreneur.
Both sides have their points and make a lot of sense, and based off what has happened to you in the past, can really shape which way you would go with this. If you have been burned bad in a deal, and everything went south on one or more occasions I can see why you would become hesitant to relinquish your money to someone without any safety nets established. If you do not want to over complicate things and give the entrepreneur freedom, then I can see why no structure is good as well.
In my opinion, and based off various business owners and articles I have read I would lean more towards the common stock method. Not many people perform well when you do not show any confidence in them or allow them the freedom with their ideas. By enforcing structure, you are in essence, restricting the creativity that an entrepreneur has in their venture.
Serial entrepreneur, Jordan Raynor, spoke on this topic some on the podcast “The Business Lab” with Laine Schmidt. He warns entrepreneurs of seeking investments because it gives up thought and equity in your idea and can then cause your ideas to change based on other people. With structure in a deal, it can inhibit, and Raynor warns away from any sort of investments that can change or shift your perspectives. Not that common stock is free of any sort of scrutiny, however it is much less which will allow the entrepreneur to pursue his idea and work to their full capacity.
My only hold up with this would be if an entrepreneur has a losing record in business startups. Similar to one of my previous posts, finding a winning entrepreneur who has a great record is who most angels look for. Basing it off of their record should definitely tell how you should offer your investment, and most entrepreneurs who have a winning record would probably not agree to an investment that restricts them too much.
Jacob Morgan wrote about Jeff Bezos and how he holds to the point at Amazon that “ More people means more communication, more bureaucracy, more chaos, and more of pretty much everything that slows things down”. He only allows groups to be 10 or smaller. This goes along with my idea that when you start putting in my more people, more ideas, more anything, it can take away from the original idea of the entrepreneur and hurt the business. More red tape, more strings, more anything slows things down and hurts the chances at success.
There is no perfect science to any of this, however trusting in people and allow them the freedom is something that I see working out. Then helping out where you can whenever they request it. Be ready and able to assist in whatever way you need to.
- Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.
- Morgan, Jacob. “Why Smaller Teams Are Better Than Larger Ones.” Forbes, Forbes Magazine, 15 Apr. 2015, http://www.forbes.com/sites/jacobmorgan/2015/04/15/why-smaller-teams-are-better-than-larger-ones/#2fa9bd4f1e68.