Before investing in a startup business, here’s what to look for:
A business plan. The projected results should be based on reasonable assumptions. Ask an accountant or an investment advisor if the projections make sense.
A solid management team. Look for an experienced business person to run the company. No matter what the concept, a company can fail if there’s no one who knows how to operate a business.
Financial strength. Without enough capital, the business will cease to exist. If the business runs short of capital you may be asked for more, putting you in the position of throwing bad money after bad.
Suitable business structure. If you’re offered a choice between making an equity investment or making a loan, choose equity. With your money at-risk, you should have the upside potential of owning part of the company.
Potential payback. The agreement should be formal rather than a handshake deal, specifying whether you’ll be repaid with regular interest payments, dividends from any future profits, or compensation for services rendered.
An exit strategy. If you’re going to risk your money you should know how you might be rewarded. Do the founders intend to stay around and repay you from operating income? Or do they hope for a public offering or a buyout by a larger entity?
