It is rarely an easy, cut-and-dry thing to borrow money for a business. More often, there are strings attached to whatever form of finances you are getting a loan through, whether they are high interest rates on straightforward business loans or returns on investments for equity investors. But when you need a business loan and want to skip the hassles of traditional lending procedures, equity investors are one of your next options. Equity investing, if carefully considered beforehand and gone into with clear communication about financial expectations, can be extremely rewarding for both the business owner and the investor. But it also has the potential to be complicated and a strain on you and your business. Here are some factors you will want to think about when stepping into the world of equity investments.
Equity Investing Business Basics
When equity investors put money into your business, they are supporting you and your financial future, but they are also taking a major risk and investing in their own future. Their success rests directly on the success of the business. If the business thrives and does well, then equity investors generally get a cut of the profits. However, if the business flops and fails to reach its expected profit margins, the equity investor also loses out.
Therefore, it is in your and your equity investor’s best interest to give your business the best possible shot at success. In the case of equity investing, it is either a win-win or a lose-lose situation.
What Do Equity Investors Get in Return?
In exchange for their financial contribution to your business, equity investors generally receive a percentage of the business profits or other benefits that are arranged prior to their investment. It is a common occurrence that equity investors receive quite a large piece of the financial pie, simply because their risk in investment is fairly substantial. Remember, if the business does not do well, neither do they.
In addition to profit sharing, equity investors typically enjoy significant benefits within the hierarchical structure of the company. Here are some of the most common rights that investors may demand:
- Voting on a board of directors
- Voting to elect presidents, chairmen, financial executives and other major company roles
- Exercising their right as a board member to change and initiate company policies when they see fit
- Being treated as a part of the company by being alerted of internal business matters and proceedings
- Instigating a lawsuit against the company if their rights as an equity investor are not upheld
Ways to Incorporate Equity Investors in a Business
When accepting equity investors into your business, there are a number of different ways to think about their role in the company. Consider each and choose the method that works the best with your existing business structure.
- General or Limited Partnerships: While general partnerships with your equity investors are easy to achieve legally, they involve the investor taking on some liability in the company, which they may not want. In a limited partnership in which you are the general partner and the equity investor is the limited partner, you hold much liability while your investor holds very little.
- Limited Liability Companies: Limited liability companies (LLCs) are fairly easy to create and maintain and hold a significant set of tax advantages. They also have the advantage of giving your company the limited liability of a corporation.
- Corporations: While corporations are somewhat more challenging to set up than LLCs, they offer the option to have shareholders who do not take personal liability for the business. Corporations may also have to abide by certain corporate laws that are specific to that business structure.
As you can see, there are a number of ways to go about incorporating equity investors into your business in a safe and smart manner. By knowing exactly what you are getting yourself into, you can be better prepared for the challenges and rewards of equity investing.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.