If asked to invest in a private venture, here’s what you need to do – CNBC

Tetra Images | Tetra images | Getty Images

A few years ago, I had a client tell me he invested in a fancy bowling alley — the new party hot spot in town. It’s since shut down. Another client shared that he joined the board of a start-up and they’re looking to raise capital. He wants to figure out the right dollar amount to invest.

High-net-worth investors are approached often to put their money into a private company looking to grow. The offers come in all shapes and sizes: Small companies need capital to expand, start-ups often need several rounds of financing, and friends or family members with a “Shark Tank” type idea want to make a run at creating their dream.

These investment ideas often sound exciting and exclusive and seem to hold the potential for much higher returns than a traditional stocks-and-bonds portfolio. So how do you determine which ones to say yes to, and when to walk away?

More from FA Playbook:
‘Investor alpha’ is the most important financial strategy for 2021
How to create a charitable trust as part of an estate plan
Here are 5 lessons the pandemic taught this financial advisor

Before tying up your money in one of these ventures, take the following steps to help ensure you make a good decision.

Create a financial plan: If you have a large sum of extra cash, first create a financial plan to determine your financial goals, such as