Equity Financing – Bringing in an Investor Shareholder.
Debt involves borrowing money, whereas equity financing involves selling a portion of equity in the company. Equity financing does not place an additional burden on the company, however you will have to give the investor a percentage of your company. Debt financing, on the other hand, involves borrowing money and paying it back with interest. Debt financing sometimes comes with restrictions on your company’s activities that may close doors on opportunities.
In speaking with friends and family about your newest business idea, one of your friends is showing particular interest, in fact, they want to throw some money at the company and reap some rewards if the idea flies. Now, you may be wondering: what happens next?
Next, you’ll want to get in touch with a corporate lawyer to prepare the necessary documents to bring your friend on as a shareholder. When you get in touch, there’ll be some issues that need to be discussed. Here’s a list of issues to keep in the back of your mind when you’re considering taking on a shareholder in your company:
Firstly, how much of the company is your friend – or investor—going to take? After all, it is your idea, your business. Further, if the idea has already been physically created and tested, think of all the hours you spent labouring away on this particular project! You’ll want to know how much it is worth, and that means coming up with a method of determining how much your friend’s money is in shares. Will it be a 50/50 interest? Or perhaps a 15-20%? Should the shares be issued to this investor be voting shares – as in, can this new investor have a say in business matters that require a vote? Would you rather they be a silent partner, and create a new class where their vote is not weighed as heavily as yours or other shareholders?
Once all these questions are answered, you and your lawyer can talk about control issues, and how you are going to retain control over the company and how to keep the business in motion regardless of shareholder issues. This means drafting something called a “shareholders agreement”. A shareholder’s agreement should address issues such as:
- What happens if a shareholder dies?
- What happens if an investor wants out – can they get their money back?
- Will the investor/shareholder be a director of the company? How involved will they be with running the business?
- What happens if you get an offer to purchase the company from a third party? Can the investor prevent the sale or will his input be not necessary?
Businesses sometimes need a “jump start”, which usually required an influx of cash – sometimes that cash will become from friends, family, colleagues, or even interested investors. The important question to keep at the forefront of your mind is how you will structure this transaction in a way that will allow for the much needed cash flow, provide assurances to the investor, while also protecting the original owner of the business – you!
Get in touch with our business lawyers at Barriston Law today to get legal advice on the best way to facilitate investments structure and grow your business while protecting your interest every step of the way.
Written by Pamela Heary and Nahal Golmohammadi