What are some of the disadvantages to taking

venture capital
Investopedia, 2018

Finding affordable financing for a start-up can be a challenge for small business owners. Banks are wary
of loaning money to a business without a two-year track record, and raising funds from friends and family
has an inherent limit. A venture capitalist, however, can provide a company with the capital necessary for
start-up costs and other expenses associated with expansion projects. An individual or firm acting as a
venture capitalist has the funds for investing in a new business and the financing acumen readily available
to help companies in their infancy, but disadvantages run rampant. Although venture capital is a viable
source of equity financing, business owners should be aware of the caveats that exist with this type of
funding.

Forced Management Changes

One of the most common practices in venture capital equity financing is the generally unwanted
additional management personnel infused into the company requesting funding assistance. Because a
venture capitalist typically has a great deal of business prowess, there may be an assumption a member of
his or her management team is needed on the ground at the financed company. This can be presented
under the facade of needed support and industry experience, but usually a business owner does not want
or need an additional person in management. For the majority of venture capital agreements, however,
these management additions are a requirement to receiving funding.

Loss of Equity Stake

Venture capitalists are able to provide small and start-up businesses with much-needed capital because
they have easy access to it. With such large sums of money exchanging hands, it is no surprise equity
positions within companies that accept venture capital investing are drastically shifted. A venture
capitalist requires a large equity stake in the company to which he or she is providing funding to
safeguard his or her initial investment.

Decision-making Ability
In addition to changes in management teams and equity stakes, receiving equity financing from a venture
capitalist comes with more strings attached to the decision-making process. Business owners are typically
required to consult with the venture capitalist individual or firm prior to making any decisions in capital
spending, expansion and personnel changes. This can create tension between the business owner and the
venture capitalist, as the funding person is most likely not working closely with the owner on day-to-day
business operations.

Delays in Funding
Because venture capital investing involves a large amount of capital exchange, a venture capitalist may
not be willing to extend all requested funding at the same time. This means business owners may have
certain milestones to reach prior to receiving the financing they initially requested, which could put
additional undue pressure on them. Delays in funding could also come by way of an extended vetting
process of the start-up business asking for financing.

Entrepreneur will be the last to be paid

The term sheets from the VC will specify how the VC and the entrepreneur get paid. The VC gets paid for
his time and advice all along the way through dividends, while the entrepreneur will usually collect a
salary. When the company reaches its exit point (ie it gets sold or it goes public), everyone looks forward
to getting paid. For runaway successes, there is enough to go around. In the likely case that the company
does not become a runaway success, the VC will get paid first as per the term sheets. If there is money
leftover, the entrepreneur will then get paid.