It is not always easy to choose what investors to incorporate in a company, and in our experience, this should be an important point of permanent analysis and it is usually crucial in the company’s development. Many companies, especially start-ups, include many small investors in their first rounds of financing. Is this positive or negative? What is the ideal number of investors? These are recurrent and difficult questions to answer and each company is different because the people who drive it are different.
It is logical for a company to incorporate in its early stages investors close to the entrepreneur (known as the 3Fs: Friends, Fools & Family), since the level of risk of the project does not allow incorporating professional profiles without having to cede control of it.
As objectives are reached, defining the business model and obtaining market response, small professional investors known as Business Angels, begin to be approached. These first rounds of financing are usually covered by several retail investors. The urgency of capital injection may mean that the final composition of the company’s shareholding structure and the alignment of future investor interests may not be taken into account.
Venture capital funds (professional investors in subsequent rounds) usually prefer companies with fewer investors to minimize potential sources of problems. Both at the time of entry, as well as in subsequent rounds and especially before a potential sale of the company, fewer investors means having to negotiate less and be able to align and agree the strategy more easily.
For example, if you have a buyer willing to acquire 100% of a company, a minority investor (even with 1% of the company) can have in his hands the good end of the operation or even the final price of it. It is true that it can help to have a membership pact and syndication agreements, but the fact that someone may threaten not to appear at the notary’s office on the day of the sale or force conditions to do so, this can be very detrimental to the other partners.
That’s why it’s important to define a long-term strategy, to have a proper legal advise and choose well who your travel companions will be and how much value they can bring to the company.