Are You Sure You Want This?

Taking money from an investor will change your world—and it doesn't change a little; it changes a lot.

I've been on both sides of this transaction. I've accepted money from investors and invested in entrepreneurs. Here's what I learned on the entrepreneur side of this transaction.

My role changed.

When I took the money, I became a fiduciary. I didn’t know what this meant then, but I learned quickly, and you will, too.

Here is a definition of fiduciary: A fiduciary is a person legally or ethically obligated to act in the best interests of another person or group of people. Fiduciaries are responsible for managing the money or property of another person and must make decisions that benefit that person, not themselves.

Making decisions in my investors' best interests changed how I ran the company. It wasn’t my company anymore. It was now our company. I knew a heck of a lot more about the company than my investors, but they still had a voice.

Their voice meant I was accountable to them.

Before the investment, it was me and my partner. After the investment, I reported to someone, and that person was my shareholder. I was responsible for managing up. This meant setting expectations and, hopefully, exceeding them. I promised them a return on their investment, and they held me to that promise. This is accountability.

And this accountability meant my performance was being evaluated.

Being the company's founder is a title that can never be taken from me. But that matters little to a shareholder who treats me now, post-investment, as the CEO. I am a manager who is responsible for hitting my numbers. If I make my numbers, I am a good manager. If I miss my numbers, I am a failed manager. This may sound harsh, but it is the simple truth.

Successful managers set milestones and financial goals. Their job is to lead the company to attain those milestones and numbers. Every milestone achieved and every number hit adds to the manager’s credibility. These are the managers who keep their jobs and are in high demand in the marketplace. These are the managers who build a company of increasing value, year in and year out.

I was now on the clock.

I learned the first, and only, thought investors have in an early-stage investment is, “When will I get out?”

Investors want liquidity. Liquidity comes with an exit, either public or private. In any case, these new shareholders want their money back with a great return. The longer it takes for them to get their money back, the higher the return needs to be.

Early-stage investors don’t think of single-digit returns. They can get single-digit returns in public markets and have instant liquidity. They are thinking in terms of multiples of their investment. The earlier the company’s stage, the higher the multiple. It could be 10-20x for a seed-stage investment, down to 3x for a Series B or later.

The entrepreneur needs to understand this. There is, after all, a time value to money. I once heard an entrepreneur tell an investor he should be thankful that he made two times his money. But the investor wasn’t impressed or thankful. After all, his money was tied up in this entrepreneur’s company for over ten years. That equated to a 7% return.

The investor is thinking, “All that risk. All those years. All those meetings. All those updates I read. All the promises. For what? 7%. I could have gotten that in corporate bonds and sold them anytime I wished.”

There is a time value to money, and this is the clock that's ticking…your clock.

Don’t forget the golden handcuffs.

When I took the investment money, I realized I was in. And in for the long term. I made a commitment to these investors. This is what I was going to do come hell or high water. My career options were over. It was this company, this opportunity, that was going to make or break my career and reputation. When investors talked to each other after the clocked stopped ticking, they would speak glowingly about me or in whispers of failure.

Taking money from an investor is serious business. These people worked hard for their money and they fully expect you to do the same. And you can be sure of this: your reputation depends on it.

Now I ask you…Do you want to take the money?