Like say you’re starting a new business and you want investors to help fund the start up, how does that work?
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It varies widely depending on the business but the gist of it is this:
1. First, you need a business plan. In this plan, you plot out what you expect to spend to get off the ground, what you plan to make, and what profits you think you’ll get. You then put this into a format where other people can easily review and see if they agree. You may also come up with materials to showcase your idea in the best light.
2. You then have to find people who would want to invest. You would show them your materials, and they will ask questions and try to poke holes in your idea. Have you underestimated your costs or overestimated your revenue? Where are the risks things don’t go as planned? If it’s an actual, operating business, they’ll do what’s called due diligence, which is just a fancy way of saying they will look for themselves to see if what has been said about the business is true.
3. If they agree to invest, they will then decide on a structure. If it’s an equity investment (most start-ups are), and if so how much? Some investors will do a preferred equity. If it’s debt, they need to iron out terms such as interest rate, fees, and collateral. Lawyers are usually involved in this stage.
4. If all that goes to plan and the documents are signed, they then fund the money. They will almost certainly request some kind of reporting to check on what’s going on with the company, and may request board seats. Equity investors often will demand board seats as part of their investment.
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