On behalf of Kadish & Anthony Law Group posted in Closely Held Businesses on Wednesday, March 23, 2016.
When opening a new business, most Arizona entrepreneurs require startup capital. Most people do not have the kind of money that it will take to initiate a business, so it will be necessary to obtain financing. In lieu of a traditional bank loan, closely held businesses might find that taking on one or more equity investors makes more sense. However, some things need to be taken into consideration before signing anything.
First, equity investors become part owners in the business. As such, they have rights. They have the right to vote for who will comprise the board of directors. They have the right to vote for or against any major decisions that affect the business, which they must be informed about ahead of time. Furthermore, they are entitled to file suit against the company if they do not believe they are being given the chance to exercise these rights.
Equity investors commonly ask for a larger share of the company’s profits since they stand to lose their investment if the business does not succeed. In addition, they might also demand that salaries for all employees be capped — at least until the business proves profitable. Considering these issues, an Arizona entrepreneur would benefit from carefully considering whether this is an option that would work for him or her.
Many closely held businesses do well with this alternative financing option once they understand all of the pros and cons. Negotiation is always possible and encouraged to ensure that the company receives the best deal before entering into an agreement. Therefore, it would not be a good idea to proceed without the assistance of experienced legal counsel.
Source: FindLaw, Equity Investors & Your Business”, Accessed on March 19, 2016