Whether you’re raising debt or equity, our advice is to get as many investors/lenders as possible. While there are drawbacks to having a lot of investors, in our view the pros far outweigh the cons.
The biggest cons of having lots of investors are that it makes the cap table larger meaning you may have to collect more votes to get important governance issues passed. However, no VC will ever turn down a good deal because it has too many investors. More investors generally means more questions from them, but questions can be be headed off so long as you communicate clearly, honestly, and frequently with investors. We find that monthly or even weekly communication is the way to go, and you’ll likely get few if any questions so long as you’re detailed and candid (we have a lot of investors in our fund, so we know this from experience).
The pros of having many investors are numerous: i) investors have contacts you can leverage, so the more the merrier; ii) when you need to raise another round, you have a larger pool of people who can re-up and make your process shorter/easier; and most importantly iii) you won’t be beholden to any one investor in case you need to make important decisions and governance changes that require shareholder approval. The last point is especially important; so long as your docs require a majority vote to make major decisions, having lots of investors can prevent you from being held hostage by a large, unruly investor.
For debt, the last rule especially holds true: we have a company with a substantial loan from 14 investors, but 2 of those 14 investors represent over half the capital. This company has gone through some difficulty and we’ve had to amend the debt a number of times. Every time we do, those two investors recognize they have a lot of leverage if they collude so they generally extract material concessions from our company in exchange for amendments. Now, one of those lenders has become especially hostile which means keeping the other large lender happy has become critical.
In conclusion, while there are drawbacks of lots of investors in either your equity or debt, the pros of more investors far outweigh the cons.
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