Considerations Before Investing in a Business

There are many reasons to invest in a business, such as joining a new startup, or becoming part of an established and successful business poised for more growth.  Sometimes these new or established companies just need a little additional working capital to be successful.  Before committing, however, it is important to approach the opportunity with objectivity, weigh all investment considerations, and understand the risks and goals associated with the potential investment.

First, assess whether your interests are best served by an equity investment, which entails potentially greater risk but also greater returns, or a loan, which is less risky but has limitations on returns.  Whichever you decide, make sure you and the business management and other investors are on the same page about the terms of the deal. Research the company and its key players (e.g., essential management or personnel) to get a good idea of the experience and integrity of the individuals that are essential to the operation.

Second, decide whether you want your investment to come with the power to have input or control over the businesses’ operational decisions and practices. If you do seek this type of relationship, make sure you understand the risks of any potential personal liability you could be faced with, such as officer and director liability.

Finally, establish what kind of reporting and feedback you want on business operations. If you are to receive any feedback including potentially negative feedback about the business’ poor performance, will you have any remedies to salvage part of your investment? For example, if you choose a debt based investment, as a secured investor you would have priority in a bankruptcy.  Alternatively, if you choose an equity based investment, consider having preferred stock rights that will allow you to get paid before others if the corporation dissolves or there is a dividend payment.

If you are considering investing in a business, it is highly advised that you work closely with a competent and experienced attorney. Legal counsel can help you evaluate the risks and terms of an investment opportunity.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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