Avoiding Legal Trouble

Don't Take An Investment For Your Small Business Without Speaking To An Attorney

In the early stages of a business, capital isn't always flowing freely. In fact, many businesses have limited funds available. Consequently, when an investor comes along, it's easy to quickly accept their offer. However, it's important to be cautious, as every investment might not fit your organization's plans.

Investor Screening

If you've ever heard the saying, "Not all money is good money," make sure you understand that it's an accurate statement. The funds an individual is offering you might not necessarily come from someone with whom you want to enter into a financial partnership. Whether you know the potential investor personally, they were recommended by a colleague, or they discovered you, it's important to do some screening. 

A part of this process involves working with a corporate attorney who will vet the individuals' information, business history, and the validity of any terms they want you to adhere to as part of the investment agreement. 

Investment Terms

Unless it's a close friend or family member, it's safe to say that the person is expecting something in return for their investment. Before you consider taking the funds, make certain you have a clear understanding of what the terms are.

In some situations, the person will want a return on their investment plus additional interest, and in some instances, they might want to obtain a certain percentage of ownership of your company. Keep in mind; the individual likely had an attorney draft the agreement, so it's only safe to have an attorney review the agreement on your behalf.

Owner Authority

If you are a partner in a business and an investor has approached you, it's important for you to ensure you have the authority to accept an investment. With any dual-ownership situation, each person will have a certain percentage of ownership of the company and a set list of things they can and cannot do. 

For this reason, if you're only a 30% owner and the other partner has 70%, you probably can't make this type of decision on your own. Let an attorney review your organizational plans to see how you need to handle the investment opportunity; otherwise, the situation can spiral out of control quickly. 

Once you accept the funds from an investor, you also do so with the agreement that you will accept their terms. Before you take any investment, make sure you sit down with an attorney to ensure it's the right agreement. 

For more information, contact a corporate lawyer.