Friday, May 20, 2022

Can You Have Too Many Investors?

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When looking for capital and investors, you’re required to check your company’s asset performance, working capital, and ultimately, capital structure.

Once you’ve run over them, then you’ll need to look at your capitalization table and decide how much money you’ll need as well as the number of people or organizations you can accept as your investors.

Thankfully, a simple guideline is to determine the number of investors and shareholders you need to look for according to the size of your cap table or vice versa.

If that’s the case, will there be a situation when you’ve accepted too many people in your list of financers?

The answer to that question is yes, and this article will discuss the reasons. Before that, a disclaimer: the term shareholder will be used loosely in this article to refer to investors, venture capitalists, and any entity or organization that’s planning to back your company financially.

Some Laws Limit The Number Of A Company’s Shareholders.

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Depending on the type of company you have, the law may restrict the number of investors you declare as shareholders. For example, in Australia, private companies are only limited to having a maximum of 50. If your company exceeds that threshold, you’ll need to convert your company into a public one.

On the other hand, if you have a huge corporation with a combined asset of more than USD$10 million in the United States, the Securities and Exchange Commission (SEC) will limit you to a maximum of 2,000 investors if you want to keep your company’s financial information away from the public eye.

Too Many Stakeholders Can Spoil The Broth.

Can You Have Too Many Investors

Even if it’s legally okay to have 40 or more stakeholders backing your company, it’s not all rainbows and sunshine. Even if you have the best types of investors, you’ll still have headaches if you have a lot of them.

Remember, being a stakeholder doesn’t only mean your company will gain capital out of thin air. You’ll also need to set each stakeholder’s shares and provide them a voice in every business-related decision you’ll make. And as the saying goes, too many cooks spoil the broth.

It can be challenging to run a business with many people you’ll answer and satisfy.

Balance Is Key.

Of course, the previous situation doesn’t happen all the time. There’ll be times that 80% of your investors have minimal stakes in your business to the point that they won’t care about what you do as long as it earns them money in the long run and guarantees they’ll get their investments back in full if they decide to abandon ship.

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The key here is balance. You can choose to get a smaller number of lead investors and open a small part of the capital you need to smaller ones who are okay with relinquishing their voice in your company.

Moreover, you should also make sure they’re similar-minded individuals who are familiar with running a business. Doing so will allow you to have better management of your capital and investor group.

It’ll Force You To Restructure Your Business.

Whatever reason you’re not incorporated yet, know that including many investors in your business can force you to restructure your business.

For example, suppose you’re running a sole proprietorship and don’t want to incorporate yet. In that case, you’d need to do some business maneuvers to include your new shareholders into your business legally. 

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One of those things is to create an entirely new company and add your investors as partners to ensure you’ll be able to share profits and liability with them legally.

However, suppose they’re not comfortable with that setup. In that case, another way is to add them as employees, but that’d put you at risk of being solely liable, allowing your investors to exploit and abuse their positions.

The number of investors quickly makes a business complex. Hence, if you’re a small business, accepting many shareholders will require you to restructure your business and incorporate.

Managing Your Relationships With Too Many People Is Challenging.

Even if some of your investors are willing to relinquish their voting powers or their clout in the decisions you’ll make in running your business, you’ll still need to keep in touch and maintain your relationship with them.

  • First, you need to provide them with reports and news regarding the performance and progress of the company.
  • Second, you may require to request some of them to provide signatures. Third, you may need to squeeze out more funding from them if you don’t want to add a new batch of investors to your company.

Some Of Them May Just Become Dead Equity.

Not all investors are created equal. Most of them may have the money you need now, but sooner or later, some of them will have no extra capital when your company needs to survive.

While it’s true that their initial investment helped you, it’s hard to keep shareholders who’ve become dead equity. You don’t need to always look for new ones whenever your company needs extra funding. Again, it’s always quality over quantity when it comes to investor hunting.

Conclusion

Those are some of the reasons you can find yourself having too many investors. While it sounds nice to have many people ready to give you the capital you need to grow your business, know that you should prioritize only getting the ones who can bring more to your company in the long run. After all, having a lot of shareholders in your ranks can be messy.

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