Investing in a Startup: What You Need to Know
Thursday, March 21, 2019, 6:00 PM | Leave Comment
More and more people are getting tired of pressure from their bosses at work and unfulfilling jobs they have.
Those who think that they have something unique to offer to the world often decide to start their own business.
Now, starting a business is in no way a walk in the park as there are many aspects to consider, one of which is finances.
If you are thinking about getting into the investment game, helping get these startups off the ground could be a lucrative option.
Here are some things that you have to know.
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Understanding the risks
The first thing that you have to understand if you wish to start investing in startups is that this is a risky endeavor. There is really no guarantee that the business you decide to fund will succeed. You might win big or you might lose everything. This is why you have to make smart choices. Never invest all the money you have in one project and make sure you will be financially secure in case you lose the amount you invested.
This is where diversification comes into play. If you have the funds, you can invest in different kinds of startups. If you spread your investments across several fields, you can increase the chances of actually earning money. Furthermore, whatever you do, do not invest in areas you know nothing about. Understanding the market reduces the risk of you losing all your money.
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Sorting out your finances
Once you have found potential startups to invest in, you have to know where you stand finances-wise. In case you have enough savings, good for you. On the other hand, if you think that you will have to go for a loan, you need to weigh all your options carefully.
Make sure you have a good credit score or look into other, more approachable platforms where credit score is not the most important thing. Furthermore, if you already have some debt, consider a debt consolidation loan as then you will have fewer payments to think about.
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Look into the founders
Before you decide to give them any money, you have to look at the track record of the founders of the startup. It’s important for you to be able to trust them and knowing about their background is vital for that. You should ask about their education and previous work experience. See whether they have good leadership skills as well.
Then, you should discuss what their plans for the startup are. Ask for specifics. What do they want to achieve? Where do they see the company in a year or in five years? How do they plan to use your money? How will the startup sustain itself?
Make sure you know how much money they need for day-to-day operations, how many employees they need and how big the salaries will be. Having a clear picture of the company, its founder and finances is necessary before you make such a big decision.
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Be thorough with legal documents
The final step is putting everything on paper. Before you sign anything, make sure you know what you can expect. Ensure that the percentage of the startup you own is clearly stated.
Look through the articles of incorporation, term sheet, investor agreement, by-laws etc. Go over all the paperwork and pay special attention to the documents that involve you. Don’t forget to read all the fine print as well.
Like we already said, investing is a tricky business. However, if you carefully consider your financial situation and do your research on the market and the founders of the startup, you can reach success. Good luck!
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