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What you need to know before hiring an investor for your business

When Tina McGonagill wanted to expand her food container business, she hired an investor she met at a trade show.

For $ 50,000, she gave Trent Lowenstein a 20% stake in Big Fat Lunch. Yet before she spent the money, the two were at odds over the best strategy to increase profits.

McGonagill wanted to order more stock and hoped Lowenstein would use his charismatic personality to get the product into retail stores.

“Without stock we have nothing to do, because at the end of the day when you own a product, your biggest priority is to go into retail,” she told “Money Court” from CNBC.

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Lowenstein, meanwhile, was keen to turn to social media and influencers to increase direct sales to consumers. With lower margins, there is an increase in profits on every product sold, he argued.

The dispute shows the importance of having a smart governance structure, such as a board of directors, and understanding an investor’s rights in company decisions, said Michael Goldberg, executive director of Veale Institute for Entrepreneurship at Case Western Reserve University.

“If you are an entrepreneur running a small business, dealing with investors and their input can be time consuming and counterproductive,” he said.

When adding an investor, make sure you understand how much stake they will have in your business. In the case of McGonagill and Lowenstein, she only gave up 20%. This means Lowenstein did not have a controlling stake and could not say how the money was to be used.

Networking first and foremost

Before you’re even ready to hire an investor for your small business, Goldberg first suggests building and maintaining a network. If you engage with people before you have a request, that sets the stage for when you’re ready.

“Often the first investors come from friends and family,” he said. “These are also people you know through your high school, university, business school or professional associations.”

Also, turn to mentors who can give you advice on your journey. In fact, they can be more helpful at the start than hiring a lawyer or an investment banker, Goldberg noted.

While crowdfunding platforms like Kickstarter can also be a good way to raise capital, angel and venture capitalists are more expensive and tend to be aimed more at tech companies than Main Street companies. , Goldberg said.

“The expectation when you bring in angel and angel investors is that it will grow very quickly and these investors need to get their monkey back at multiples higher than they gave you,” he said. -he declares. “This can involve the sale of a business or a [initial public offering]. “

McGonagill has decided not to spend the majority of her investor’s money. The two eventually came to a compromise, thanks to O’Leary, O’Leary chairman of the O’Shares ETF, who chairs the Money Court.

He asked McGonagill to give Lowenstein $ 10,000 to prove he could profitably sell the product directly to the consumer. If it works, he said, the company should invest more money.

“Retail will come to you after you repeatedly prove it directly to the consumer,” O’Leary said.

TO AGREE: CNBC’s “Money Court” starring Kevin O’Leary airs Wednesdays at 10 p.m. ET.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Tassels.

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