Startup Elders: Don’t let your customers invest in your company (in most cases)

You have taken the leap and started a company. Congratulations. Even, better you have built your first product and have some customers who are using it. Some of them have even said they love it! Perhaps, you have some revenue coming in and you are starting to feel positive about all those months / years of slogging away. Mark Zuckerberg watch out….

Out of nowhere, you are talking to one of your customers, one of your favourite customers in fact who you have become quite close to, about your business and how you see the future and the topic of your next fundraise comes up.

“I/We would like to invest in your company” — she says

You should feel flattered, you should feel proud and its ok to take a moment to smile but under NO circumstances should you say Yes and these are some of the following reasons:

1. Your customer is probably going to ask for special investment terms — they know that they are important to your business and as such will ask for a discount. If you say Yes then you have taken expensive money with no guarantee of future business but if you say No then you risk harming your relationship and the business you have worked so hard to date.
2. Your customer will probably ask for a special commercial deal for their business-they know they are important to you and will demand a discount. In a similar vein to the above point there is no good outcome here.
3. They may ask for a Board seat or access to special information-unless you only have one customer and only want one customer then you are likely to also be providing services (or trying to at least) to direct competitors of the customer who wants to invest. At this early stage of you business you cant risk cutting off other clients like this. They will find out about your new shareholder and probably won’t like it.
4. They will ask for special product features-you will end up having to tweak your product to suit your new shareholder. They hold a lot of leverage over you now. This is probably not what you wanted to do when you started your company. It’s hard to say no though.
5. Counter to what you expected, they may actually do less business with you having invested than they would have before-your customer, especially if they have invested personally and not using company funds, may feel they have to step away from dealing with you directly to avoid any conflict of interest situation. They may make it even harder for you because they don’t want to be accused of showing favouritism. For those of you with kids, it’s like when you referee a football match that your kid plays in. You probably are harsher on own child than any other player, as you don’t want to be accused of bias.
6. You also may outgrow each other-just because your customer is important today, it doesn’t mean they will be tomorrow. Don’t tie you future growth and opportunities at such an early stage.

There are various other reasons to politely say NO and as hard as it may seem you have to say NO. It avoids numerous challenging and difficult future conversations. That said, it will be hard, so blame the Board, blame the shareholders, blame anyone you need to but don’t say YES. Please.

We have seen this before and in almost all circumstances the Founders have regretted it down the line. People get blinded by the moment. Don’t make the same mistake.

With all the above in mind I am sure there are loads of cases where customers have invested in early stage companies and it’s been a wonderfully symbiotic relationship through to IPO and beyond. To do this needs incredible clarity, discipline and expectations to be clearly documented up front. From my experience its hard to practically do this but if you can then go for it.

Good luck