There are many benefits to investing in start-up businesses. One of the more popular ways individuals and families begin their journey to financial independence are small-business investments. It can be lucrative to invest at the right time and for the right business. On the other hand, the wrong investment can cost you. There are many investments that happen privately, though you can easily get assistance from an investment broker. Today, we at Kajioka & Associates, Attorneys at Law, would like to share a few things you should know before you invest.
Consider the Business Opportunity
When investing in a fledgling business, always use caution. It likely couldn’t obtain financing with a bank and you’ll want to know why if it is seeking investors. There are not likely to be any documents to analyze. If available, ask for copies of the company’s prospectus, business plan, or operating agreement. Make sure it is laid out clearly with plenty of details after analyzing their plan. While asking questions along the way, consider the risk and reward. Projections are too good to be true, probably are.
Investment Due Diligence
Do your homework. You’ll want to know the background of all parties involved since there will most likely be a small amount of information to go on. With the members they have in place, understand the business dynamic they are trying to create. Know if the single-member LLC, business a partnership, or are there multiple members that own the company. The higher the possibility the business can collapse from within, the more members there are. Attention to detail is essential. Every serious entrepreneur will have in place has a thought-out business plan and its ok to ask questions about the plan, especially if any gaps are present.
Type of Business Investment
You’ll want to clarify the type of investment if you get to a point where you’re confident about an investment. Understand if it’s a loan or buying an ownership stake of the business as each option has its pros and cons. There are also other options out there, like preferred stock. You should always make sure they are in writing and signed by everyone involved no matter what the terms of the investment are.
Startup Investor Agreement
You should always have an investor agreement set in place matter how well you know the owner(s). In addition to the rights of the investor, the agreement should clearly state the terms of the investment. To understand the local statutes and protect yourself against fraud, be sure to consult with a Nevada contract attorney. It is important to know your rights as an investor. As an investor, do not settle for a “hand-shake” agreement and realize you have limited options for recourse until it’s too late. You’ll want to make sure you are at ease with the conditions of the agreement.
Prepare an Exit Strategy
On any investment, there is no guarantee you will ever make a cent. You should definitely have a plan if you do end up making a profit and you decide to leave your investment, however. This should be laid out in the investor agreement, whether it is by time or by return on the investment
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Before making the final decision on your investment, make sure to be cautious every step of the way and always consider consulting with legal counsel. Contact Kajioka & Associates, Attorneys at Law and set up a consultation to discuss potentially investing in a new small business start-up.