Eight Things to Weigh Before Seeking a Crucial Shareholder
A crucial shareholder invests to get a strategic benefit rather than a financial reward. If your business requires nothing but money, look to a venture capitalist or an angel investor. Do not pursue a crucial shareholder only because you think you will get a better valuation. But if you wish for a relationship with a big player in your industry, go for one. Keep these points in mind.
1. Choice of partner. Decide where your business needs help. Would you benefit from a partner with a cultured network, a leader with sales and marketing strategies your firm lacks, or an established player whose status and respect in the market would help your acceptance? Then locate the crucial shareholders who can give you exactly what you lack.
2. Access. Make a plan for approaching them. Does anyone in your network know how to reach one? Lawyers, bookkeepers and investment banks may help. Your target is a meaningful professional relationship with someone of real authority.
3. Their motivation. Work out the "something else" the shareholder wants, and judge its impact on your growth and exit plan. If they want a license, consider whether it is exclusive or non-exclusive, its scope, how long the rights last and in which region. If they want cooperative development, decide who shares ownership of improvements. If you plan to sell your company, try to persuade them to take a first negotiation right instead of a first right of refusal, which limits other bids.
4. Time. Their investment usually needs internal approval, sometimes from the board and the legal section, so expect long negotiations. A term sheet or letter of intent can keep them committed and clarify the terms.
5. A backer. Build a working relationship with someone inside the organization who can move your proposal through the corporate bureaucracy and help close the deal.
6. Careful terms. Define the scope of the deal meticulously, so you can pull out if it is not right for you. Unclear terms help the shareholder make legal claims.
7. Preparation to start. Meet to agree how the partnership will work and how much priority it will receive.
8. Flexibility. Stay open to other funding in case the shareholder does not keep their end of the bargain.