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9 tips before investing in startups

Author: Mike Preston
by Mike Preston
Posted: Sep 26, 2017
how business

It doesn’t matter if you’re looking to invest your money in business for the first time, or if you’re a seasoned investor; the process surrounding the expenditure of your money can be tricky!

Follow these 9 rules when you’re considering investing in business:

1. Have an investment criterion

Don’t make your investment decisions based solely on the pitch. Ensure you have established your own set of goals and standards before investing your money and that the business aligns with this.

2. Know how the business is constituted

Always request that you see the business plan for anyone who is proposing that you invest in their business. A good business plan should provide you with enough information for you to be able to determine if the business is feasible. It is also worth running an ASIC company search with InfoTrack on any potential business investments to confirm their credibility and stability.

3. Know what risks are involved

Like with most things in life, making financial investments comes with risks. However, by determining for yourself what various outcomes may be rather than leaving it to chance or the "that can’t happen" notion means that you can confidently rule a business as a good investment opportunity or not. Know how the business can succeed, and how it can fail. Know what is required to break even and where the money will come from should they fall short in the future.

4. Consider the tax consequences

Consider how a business investment will affect your taxes. Will it offer you any tax benefits? Will there be tax losses? Generally, many expenses that are related to an investment are tax deductible (including interest on borrowed money for buying shares). It’s important to note that Australians are taxed on worldwide income, so it doesn’t matter where you’ve invested your money, there will still be tax implications involved.

5. Know your influence

Don’t underestimate the value of your financial contribution; without your money, the founder may have nothing. Therefore, it goes without saying that you should always seek what is best for you. If the investment isn’t structured the way you want it, don’t invest.

6. Ensure that the founders have something to lose too

All businesses need an incentive to succeed. For founders, the fear of losing can be motivating, so make sure that if the business were to fail, the founders would have a financial loss as well.

7. Be organised and document everything!

It goes without saying – make sure all paperwork is always correct! Before validating your investments, check that your rights as an investor are protected. While you’re at it, make sure that everything is documented in writing and copies are made! Never rely on a verbal transaction.

8. Have an exit strategy

Sometimes things don’t go to plan. This also applies to investment, so it’s important that you have an agreed exit strategy in place. You don’t want to end up in a situation where your only way out is a public offering.

9. Be responsible

No matter who the beneficiary figure is of your financial investment, never be reckless. Don’t invest money that you can’t afford to lose; most investment capital is illiquid.

About the Author

Mike Preston is an experienced content writer and digital strategist specialized in the Legal Industry. Mike has worked on a variety of newspapers, magazines and Legal firms over the past 15 years.

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Author: Mike Preston
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Mike Preston

Member since: Aug 23, 2017
Published articles: 2

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