Investing in an existing business

rking100uk

Hi guys,

I'm looking at investing about 75k into an existing business for 7.5% equity. I've never done anything like this before. I've done a fair amount of research into the company and will be taking a position as a paid employee as well so can oversee the day to day running of the business.

I'm not 100% sure about what type of shares I should be asking for and whether I have any rights or ask for any conditions to be attached to them? The plan is to reinvest any revenue back into the company for the next few years but take a salary.

I've done a lot of due diligence on the company so I'm happy with that side of things, its more the shares and control of the company and should the company be sold in the future, if I've got 7.5% of the shares would I necessarily get 7.5% of the company or does it depend on the type of shares I have?

Any advice would be most appreciated!

Thanks

masonic

Best advice I can give is seek professional advice.

rking100uk

From who? I'm not sure what the best profession is to speak to?

talexuser

Rule no 1 - never invest in something you don't understand.

It all depends on the small print, articles of association, memorandum of association, type of shareholding etc. Less than 10% of shareholding does not give you any control over the direction of the company if you disagree with the way things are going, or possible dividend distribution, remuneration of directors, etc etc. A solicitor working in corporate law might be a first step in understanding how to protect your position?

Freecall

talexuser wrote: »

Rule no 1 - never invest in something you don't understand.

Rule no 2 - never invest in something you don't understand.

TheTracker

You should see an accountant and/or solicitor.

Learn what the offer really is and constraints and risks on the equity. An accountant may help with understanding the tax implications and best way for you to structure the ownership. I tend to just use my accountant and he organises solicitor views.

It's quite common for start ups to work in this way - equity/salary split. I don't think your problem is "you don't understanding what you're investing in", quite the reverse, it's you don't understand how to contractualise what it is you're investing in.

joerugby

In similar circumstances the two questions I asked myself were

1. Can I afford a 100% loss?

2. Do I really want the job?

Since the answer was 2 x yes, I went for it and it worked out.

Good luck.

Apodemus

One of the important things to consider is who owns the other 92.5%. And what size of holdings do others have. That will give a better indication of how the company is controlled and how decisions can be made.

Also remember that while investing in a company you work for can be a good thing, it also means that your risk is two-fold, day-to-day employment income and investment both in the same pot. Only you can know whether that is acceptable for your circumstances.

Thrugelmir

As an employee and 7.5% shareholder you'll have very little influence or control within the business.

The Company could raise further capital in the future and your shareholding % could be diminished as a result.

Investing a sum of of that size I would wish to know what the exit route is. I. E. Trade sale, flotation, buy out etc.

Glen_Clark

You say you will be a paid employee, so presumably its a business you understand and thats rule 1 out of the way.
As for the legalities and pitfalls etc etc there are too many to list on an internet thread, and too much to learn in a short time Regrettably I think you will need to pay for professional advice.

colsten

If your circumstances change, can you get your money (with a surplus or a loss or just the initial investment) back without delay?