Get Some Skin in the Game

There’s a fairly well known rule in propositioning to potential investors – make sure you have some personal investment in the business or you risk losing all interest up front. The reason for this is fairly simple – the investor wants to see that you believe in the idea enough to take some risk before putting their own money behind you.

I discovered today that not all investors are actually aware of this rule, and that it applies in reverse. A proposal I had heard about consisted of 100% introductions and connections, but no cash. This was actually the second time I had come across such a scenario, and it surprised me.

As a business owner, when looking for an investor, you are generally looking for some cash. While the investor usually brings more to the business than just their bank account, the business owner will still want to see some cash in the deal. The reason is fairly simple – the investor too should have some skin in the game.

Take a business worth $100,000 before the investor arrives (we’ll leave the derivation of that value alone for the sake of argument). The investor requests 10% equity in exchange for performing various services for the business (which do have a value, perhaps quite large). The business owner will likely retort with a request for $10,000 in addition to the services, and a deal might be struck somewhere in between.

There are two reasons for the money, though.

One is to get the investor to part with cash, showing that they truly believe in the company and are willing to take a risk. Having them provide a service at no cost is an investment of time, which may have more value in terms of dollars, but doesn’t have the same emotional connotations.

The second is to get a more widespread investment in the form of cash that can be used for a variety of reasons, instead of time, which can only be used for the particular expertise of the investor.

A message to investors – if you want to be taken seriously, include at least a token amount of cash in your deal. You can request more equity in exchange, or a particular service in exchange. The offer of cash shows that you trust more than your time with the business, but also your hard-earned dollars.