When Tina McGonagill wanted to expand her grocery 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. But before she spent the money, the two of them were at odds over the best strategy for increasing profits.
McGonagill wanted to order more inventory and hoped that Lowenstein would use his charismatic personality to bring the product to retail.
“Without inventory, we don’t have a business because at the end of the day, when you own a product, your number one priority is getting to retail stores,” she told CNBC’s Money Court.
More from Invest in You:
Don’t make critical mistakes as you expand your business
This is how you prevent financial disputes from ruining your family
Americans are lagging behind on saving for retirement. This is how you get on the track
Lowenstein, on the other hand, wanted to turn to social media and influencers to increase direct sales to consumers. With lower margins, the profit for every product sold increases, he argued.
The dispute shows the importance of an intelligent governance structure like a board of directors and an understanding of the rights of an investor in business decisions, said Michael Goldberg, executive director of the Veale Institute for Entrepreneurship at Case Western Reserve University.
“When you’re an entrepreneur running a small business, dealing with investors and their input can be very time-consuming and counter-productive,” he said.
When adding an investor, make sure you know exactly how much stake they will have in your company. In the case of McGonagill and Lowenstein, she only gave up 20%. That means Lowenstein didn’t have a controlling stake and couldn’t determine how the money should be used.
Networking comes first
Carlina Teteris | Moment | Getty Images
Even before you’re ready to get an investor for your small business, Goldberg suggests building and maintaining a network first. Getting in touch with people before they have a question sets the stage for when you’re ready.
“Often times, early investors come from friends and family,” he said. “They are also people you know through your high school, university, business school, or professional association.”
Also, reach out to mentors who can advise you along the way. In fact, they can be more helpful in the early stages than hiring a lawyer or investment banker, noted Goldberg.
While crowdfunding platforms like Kickstarter can also be a great way to raise capital, angel investors and venture capitalists are more expensive and more suitable for technology-based companies than Main Street companies, Goldberg said.
“When you take in venture and angel investors, expect it to grow very quickly and those investors will get their monkeys back in multiples of what they gave you,” he said. “That can be through the sale of a company or a [initial public offering]. “
McGonagill decided not to spend the majority of her investor’s money. The two eventually came to an agreement, courtesy of the Chairman of O’Shares ETFs, Kevin O’Leary, who heads the Money Court.
He directed McGonagill to give Lowenstein $ 10,000 to prove that he could sell the product directly to the consumer for a profit. If it works, the company should invest more money.
“Retail will come to you after proving it directly to the consumer multiple times,” said O’Leary.
TURN ON: CNBC’s “Money Court,” starring Kevin O’Leary, will air Wednesdays at 10 p.m. ET.
SIGN UP: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.