Question 3: Can a small money “investor” really ruin a business? What things should I consider before getting money from investors?
Answer 3: Anyone giving you any amount of money, property, or time or services for your business, is a potential threat to your business. Because anyone can be a threat, you need to carefully consider who to get money from as investors and the securities law issues that come into play with having investors.
Even a relatively small amount of money received from an investor could ruin your business. Whether the investor makes claims very early on or extremely late in the game, taking money from an investor can create a lot of problems if not done correctly and carefully.
If you are considering raising money from investors for your business then you need to consider the following 10 questions:
How much money do you need in order to stay alive?
How much money do you need to flourish?
Who are you thinking about having invest in your business?
How many people make up your investor pool?
Would you prefer that the money be debt or are you offering equity/ownership in the business?
What voting rights are you willing to give investors?
Can your investors lose every dime they put into your business and still be very well off financially?
If your investors lose their money will they be extremely upset or is this an investment in a business where the risks and rewards make sense to them?
Do you have reporting mechanisms in place that will allow you to provide accurate and timely information to investors about your business?
Will you need additional funds in the future even if this round of financing is successful?
After you have really thought through the answers to these questions, then you should schedule a consultation with a securities law attorney. Many will offer a free 30-minute consultation where they will tell you what you might need to document the transactions, based upon your answers to those questions. Then the attorney will want to come up with a payment arrangement to prepare the documents or to provide further specific legal advice.
The documentation package that would satisfy Securities law concerns for a majority of businesses could consist of anything from a very basic promissory note to a rather extravagant private placement memorandum and associated documents. The price to provide an appropriate package would likely be anywhere from $1,500 to $150,000 depending on the situation and the law firm.
Even though a small money investor could possibly ruin your business, if you take the time to meet with an attorney to structure your business, it is less likely. Also, it is imperative that you have an attorney help you make sure you comply with both the state and federal securities laws.