The following post originally appeared at the Impact Capitalist.
Impact Capitalists are proponents of investing in businesses or having others invest in their business(es). The benefits of having investors-owners are many. Here are a few:
- investors-owners can influence company policy
- Since investor-owners receive accounts and statements, they can put forward motions that add value
- oversee the practice of the business
- deal with unethical practices or products
- Provide insight and/or guidance based on experience or a different perspective
- Having investor-owner impact capitalists as owners of your company allows for a strong level of accountability that every small business owner needs (and should desire).
Recently, someone told me that they refused to take on an investor because they didn’t want to be a “slave to a lender.” This comment is a reference to Proverbs 22.7 (“The rich rule over the poor, and the borrower is slave to the lender.”) Many people take this verse (and many other verses in the Bible for that matter) out of context. Many people also take economic and financial concepts out of context as well. This person is no different.
But before you form an opinion of this person’s position, you must understand that person’s background. Risk-averse by nature, this person is recovering from a major financial setback and has made a decision to be in control of their financial situation with the resolve to never take on debt again.
While I do understand where this person is coming from, I respectfully disagree with their premise. The premise: that taking on an investor in their business is the same as borrowing money from someone.
Equity is different than debt. Equity is what an investor receives when they give money to a business or “invest” in the business. In doing so, an investor becomes part owner of the company. (How a business owner brings on, works with, and manages investors is beyond the scope of this post.)
Investors are different than lenders. And it’s primarily driven by their mindset and expectations. While a lender expects an interest payment and a return of the money loaned, an investor expects not only the return of their money but also a return on their money (with the expectations – and hope – of it being much larger than the interest a lender receives).
Risk is something that business owners, investors, and lenders must assess. There is typically much more risk associated with an equity investment than there is with a loan. An investor knows that they are taking on more risk than a lender and that is why they expect a larger return on their money than the interest a lender receives.
An investor’s initial role is to help bear the risk of expansion, growth, the development of a new product, etc. This is done through the business’ use of the investor’s capital. But there is a lot of risk that goes into this. An investor knows this and is prepared to lose their investment if the business fails or doesn’t do as expected.
There is always the chance of legal wrangling if something goes wrong with the business. However, the risk of legal wrangling is lessened when proper operating documents are written and are used to manage the business and investor relationships.
As I’ve told my clients for more than 15 years: “I could develop and outline the greatest strategy and plan in human history, but if you don’t feel comfortable with it, if you don’t like it, you are not going to do it. Or, if you do follow through with the plan, you will not be happy, at best, or angry and bitter, at worst.”
While it may be out of context, if the person who refuses to take on an investor would feel indebted to an investor, then they would, in fact, be a slave to the lender. Regardless of what reason or logic tell us, if we are mentally not prepared or willing to accept these ideas, we should not do them.
Yet, as my fellow contributor and formerly constrained academic has said for years, education is a way to “stamp out ignorance.”
That’s both an important objective of this blog post and the entire Impact Capitalist platform.
(For further reading about investing and risk from a biblical perspective, please see this blog post and read Matthew 25.14-30.)