Wednesday, October 10, 2007

Bringing in an Investor Shareholder

I have a client who has a company and a fantastic business idea. But as with lots of great ideas, there is the reality of getting a product to market and, by reality, I mean costs. So, he has a friend who wants to invest in the great idea, throw some money at the company and reap the rewards if the idea flies. My client has asked me to prepare the paperwork to bring this friend of his on as a shareholder. Here are some of the issues we discussed. First, how much of the company is this guy going to take? After all, my client came up with the idea and has toiled for two years developing the product so that it is now ready to take to market. What is this worth? He's going to have to be able to come up with a method of determining how much his friend's money is worth in shares - does he get a 50/50 interest or say 15 - 20%? And should the shares issued to this investor be voting shares? The same type of share as my client or a separate class? Once we get this all sorted out, we have to talk about control issues and how (hopefully) my client is going to retain control over the company that is, in fairness, his baby. This means drafting a shareholders agreement to address issues like:

(a) What happens if one of them dies?

(b) What happens if the investor wants out - can he get his money back?

(c) Will the investor/shareholder be a director of the company? How involved will he be with the running of the business?

(d) What happens if my client gets an offer to purchase the company from a third party? Can the investor prevent the sale or should he get dragged along?

Businesses often need a "jump start" with an influx of cash and sometimes that cash will come from friends or family. The question is, how to structure this transaction in a way that will allow for the much needed cash infusion, provide some assurances to the investor, and also protect the original owner of the business - the guy with the great idea or the talent or the know how. Bringing in an investor as a shareholder is only one way to facilitate an investment. A good business lawyer and accountant should be consulted prior to any final decisions being made on the best way to structure this sort of deal.

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