pros and cons

The Pros and Cons of Accepting Money From Angel Investors

Angel Investors

Last year, we shared a post about the difference between venture capitalists and angel investors and what both parties can do to benefit small businesses in need of funding. For a fledgling startup, it might initially seem as though there are only upsides to getting investors interested in your business — after all, it’s extra money that you could really use! However, there are still a few areas of the process to watch out before saying yes to the investment. Here’s a shortlist of the pros and cons to keep in mind when getting started.

Pro: You’ll have more money

Let’s bring everyone up to speed on what it is an angel investor does first. Angel investors take their existing wealth and invest a chunk of it into your business. In return, they only request a piece of equity in your startup. These investors are all around us — doctors, lawyers, and even existing entrepreneurs can all be considered angel investors. However, unlike venture capitalists, they don’t have millions to financially cushion your company with. A typical angel investment varies at $25,000 to $100,000 per startup.

If an angel investor believes in your business and its offerings, they’re willing to take a leap of faith for you and invest in it. Now, you’ll have more money to put towards your company and various initiatives to help it grow like hiring new employees. This type of money is not a loan, so you’ll never have to worry about repaying it back, but before anyone invests…

Pro: Attracting angel investors means you’ve (probably) got a great idea

Angel investors are naturally drawn to entrepreneurs that are passionate about their companies, but even more so to the ones that understand how it can succeed over time. Before they invest, they will want to see your business plan to make sure you’re on the right track. (After all, once they put some capital into it, this is a track they’ll be on too!) Here’s your chance to draft up a business plan, elevator pitch, and executive summary that views your business and how it fits into the market as critically and objectively as possible.

Con: The business will no longer be 100% yours

For some entrepreneurs, this might not even be much of a con. If you don’t mind having others take charge, stepping back to allow an angel investor to step up and take control isn’t an issue. Other small business owners might not be so on board with having an outside party take over though. As advised by QuickBooks, if you’re not ready to let go try to find an angel investor you know or who understands your business first. Talk to them about the process and ask any questions you may have before investing. This will give you a chance to find out if you’re okay with having someone else run the startup too or if it’s a better idea for you to keep your freedom as a solopreneur.

Con: You might wind up having less money

Remember when I said earlier that all angel investors want in return for investing their capital in your business is a piece of equity? Because your startup is so new to the world, the risk of success and/or failure is higher, leading to investors taking a bigger slice in the pie. These equity percentages can start at 10% or more — and that’s a lot for a new company! Be sure to discuss in advance the expectations that angel investors have with your business and whether or not you’ll be able to meet them at what they’re looking for.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that KPMG Spark’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of KPMG Spark.

Pros and Cons of Hiring Independent Contractors

independent contractors

Whether you're launching your first startup or managing an established small business, you know that overseeing your business is no easy task. When the workload becomes too much, having some help can make your job easier and relieve some pressure and stress. As your business evolves, you may find that you do not have the skills to tackle every task. 

Remember that instead of taking on too much work or tackling tasks beyond your skill set, you can turn to skilled individuals to help your small business excel. Independent contractors can help you better manage your workload or address those job tasks that aren't your strength. The IRS generally defines independent contractors as those individuals whose job tasks are controlled by the individual rather than the employer. Evaluating the pros and cons of using independent contractors is essential before hiring a freelancer. 

Pros 

Additional Help

Independent contractors can provide the manpower your small business needs to thrive. When work picks up, you might need extra hands to pitch in, and an independent contractor is a no-obligation way to find that help. You can enjoy the benefits of assistance without bringing on additional full-time employees.

Cost Savings

Independent contractors can be a cost-effective way to add to your small business team. Because they are not full-time employees, you do not have to offer benefits like paid vacation, worker's comp, health insurance, or a 401(k). You can also save on payroll expenses. Instead, you simply pay the contractor at the agreed-upon rate, whether it's hourly or per project. The freelancer is also responsible for paying any self-employment taxes, taking the task of withholding deductions off your hands.

Flexibility

Working with independent contractors offers flexibility as you staff your small business. You can hire a variety of contractors on a per-project basis rather than committing to them for the long term. Mix and match talent as your business needs change. You might establish ongoing relationships with some independent contractors or seek out new freelancers when you need help in a new area of your business.

It might sound odd, but hiring an independent contractor can also provide flexibility in terms of firing. When independent contractors come on board they know (or should know) that they are not beholden to the same perks as those who actually form part of the company. The temporality and need to renew contracts is telling in terms of uncertainty. Firing a independent contractor is in actuality discontinuing service with another company who doesn't meet your needs. It can, and should be a lot less emotionally taxing than firing an in-house employee.

Protection 

Hiring an in independent contractor can be an added measure of protection as it provides less exposure to employment related lawsuits. 

Cons 

Lack of Control 

When you welcome an independent contractor to your small business team you don't have much control over that individual. They are able to set their own schedule, time frame and work environment when it comes to completing the actual work. Additionally, while you might have a professional relationship with the contractor, your perceived authority may be limited. If the individual goes on vacation for three weeks or is slow to respond to emails you simply have to wait, or find a new contractor to take his or her place. 

Search Process

Independent contractors aren't always knocking on your door looking for work. When you're hiring a full-time employee, you can place an ad in the local paper or on the web and quickly get responses from many qualified applicants. Because fewer individuals are seeking contractor jobs, you're recruiting from a smaller pool. While you still might be able to find the right freelancer, the search process may take longer or require more work than you anticipate. 

Turnover

Independent contractors will likely come and go more often than full-time employees depending on the project at hand or natural churn since some might not be the right fit for your business' needs. Others might find full-time work or simply move on. Since turnover is more likely with independent contractors, this staffing solution might not work well for small business owners who do not want to regularly look for assistance. 

Intellectual Property

Similar to "lack of control," is the possibility of not owning the IP your independent contractor creates. This can cause significant losses is their creation becomes integral to your business and you lose the right to the IP.

Increased Scrutiny

By hiring an independent contractor you open your business to more scrutiny by the government for improper designation. There can be severe penalties for business owners who pay individuals who should be designated as employers as if they were independent contractors. 

How to Evaluate Independent Contractors 

Now that you know the pros and cons of working with independent contractors, you can decide whether this staffing solution will work for your small business. Weighing three factors can help you identify the right staffing solution for your needs.

Type of Work 

Consider the type of work you need assistance with. Are the tasks well suited to an independent contractor? If there's a significant learning curve a full-time employee may be a better fit. However, if a skilled independent contractor can step in and offer immediate help, this type of staff member may be suitable for your small business or start up.

Timeframe

How long do you need assistance? If you expect to need help for the foreseeable future a reliable full-time employee may be the most practical choice. However, if you have a busy season or a big project that requires temporary additional manpower, an independent contractor is a no-obligation way to help your business through those busy times.

Budget

How much can you afford? An independent contractor should generally cost you less than a full-time employee, which can be appealing to small businesses on modest budgets. 

Of course, you'll need to shop around and find out the going rate for an independent contractor in your field. Overall growing your small business does not always require a staff of full-time employees. Relationships with reliable and skilled independent contractors can potentially help your small business grow. Determining whether or not this type of staff works for you is the first step toward expanding your small business.