What level of return should you offer to investors? Since small business ownership is inherently risky, do not be surprised if returns range up to 40% per annum. Generally relatives and less sophisticated investors are willing to take less return for their risk. If the capital is in the form of a loan, you should plan on monthly or quarterly loan payments. Most likely you will need to offer collateral (equipment, receivables, inventory, etc.) which will make it more difficult for you to obtain bank loans in the future (since the bank will want the same collateral). For equity, you can offer either common stock (which gives them voting rights and is usually accompanied by a guarantee to elect them to the board of directors) or preferred stock (which usually is non-voting, but can have all kinds of preferential benefits to the shareholder).

Understand what you are giving up. For example, in some states a minority shareholder above a certain percent (such as 5%) is entitled to review the books of the company at anytime during business hours. This can become a nuisance as the investors starts looking over your shoulder and offering unsolicited advice or pressuring you to declare dividends whenever the company scrapes together a few bucks. You can combine several financing instruments to give the investor a greater comfort level while maintaining some flexibility. As an example, you can set up the capital infusion as a convertible debenture (i.e. unsecured loan) so the investor will earn interest regardless of how your corporation is doing, but the investor has the option to convert his loan into stock if it looks like that will yield a higher return to him. The advantage to you is that you will be relieved of regular debt payments just when the company is growing faster, and thus needs the extra capital to sustain that growth. It puts off cashing out the investor for a few years when (presumably) your company is stronger and more able to spare the cash.

When considering taking on investors, it is important to understand what motivates them to make an investment in your company. They are not looking to make a career out of the company, as most small business owners are. The investor is seeking an above average return and a fun investment. That means that you must have a 5 year exit strategy prepared to propose before you even ask for the funds. Show the investor how he or she will cash out at the end, and why you believe the company will have the funds available at that time to pay the investor. You should formalize this strategy with a "call" on the investor's stock (i.e. the right to buy back the stock at a predetermined price or formula based upon book value). Sophisticated investors often want a "put", also (the right to force you to cash out their investment within a certain time frame for a predetermined price or formula valuation).