There are basically 3 legal ways to bring new investors into a San Diego LLC or corporation.  Bringing in new investors or business capital must be done in full accordance with federal and state law.  There are substantial risks when raising business capital.  Many securities violations occur when well intentioned people attempt to raise money for their business without consulting the proven San Diego business attorneys at the Watkins Firm.

What are the 3 legal ways to bring new investors into your San Diego business?  The first is by adding a new member or shareholder to your LLC or Corporation.  This should be accomplished by creating or modifying the operating agreement for an LLC or shareholder agreement for a corporation.  The investment must be properly structured and tied to an ownership position which usually includes voting rights.

The second method is through the syndication of an Initial Public Offering or IPO where you limit the number of investors and offer a prospectus which provides details about the transaction, how the funds will be used and how the investment will be secured and generate a profit for investors.

The third of the 3 legal ways to bring new investors into your San Diego business is through a large public offering usually structured by a venture capital group or banking partnership.

The experienced San Diego business attorneys at the Watkins Firm can assist your business as you bring in new investors or money, and prepare the company for a new phase of growth and expansion.  We will help to develop the necessary agreements and documents and guide you through the process to ensure that your interests are protected, and that you are not risking control of the company or future decision making when raising necessary business capital.

Pro-Tip: “Well, first of all, let’s be clear. We’re talking about privately held companies. When you invest in a company down the street, that’s not on the New York stock exchange, you still become a shareholder and shareholders have rights. First thing you should think about when you become a shareholder is like shareholders should be treated in a like or similar fashion. When you join a corporation by investing and you find out that someone with a similar shares as you is getting paid more dividends than you are, you are not going to like that. And you shouldn’t because that’s why we have different classes of shares. We have, you know, B general share stocks.

That’s why we have those rules. Also. You have to look and find out if there’s a shareholder’s agreement, which could define who gets what and who gets paid. What, but generally speaking, if you want to pay people differently than what their ownership is, you should have a limited liability company. But if you’re selling shares, you’re still subject to shareholder laws in the state of California and other places. And those shareholders have a right to vote. They have a right to see certain disclosures. If you have over 5%, you get to see more financial documents of the company and you have a right to dividends. If people are, if other people are getting dividends, then you have a right to show up at this annual shareholders meeting.

Most substantial shareholders have voting rights. Unless you’re told in advance, there’s going to be a non-voting share or there’s going to be some other agreement in place you’re supposed to have a right to vote and how are voting rights weighted.  Is it by the type of shares that you hold? Or is it the percentage? Well, that’s, that’s where it gets tricky.  When a corporation issues shares or authorizes shares, for example, they’ll authorize 10,000 shares and they’ll issue 1000. So when you buy half of the issued shares, you’re not getting half the company, you’re getting 5% because the other 10,000 are sitting back at the corporate offices and they can sell those too. So you’ve got to make sure that your pool of investors is not diluted or the stock is not diluted in ways that some companies tend to do to the disadvantage of their shareholders.

What are some of the typical reports that you would should expect to receive as an investor or shareholder?  What are some of your inspection rights?

Depending on what percentage of the company you have acquired, you should have a general right to see the financial disclosures the company gets, if you are less than a 5% shareholder. And if you own more than 5%, it may surprise you to learn you have the right to audit the company’s books and records. And sometimes you’ll be asked to sign a non-disclosure agreement to do so, but a shareholder with more than 5% interest in the company in California can literally give notice and appear in two weeks at the company offices and start making copies or investigating what’s going on with the company. Or if that doesn’t happen, they can literally file a motion in court and have a judge issue orders. We make sure our clients with a 5% or higher stake are given access to the books and records of the company.” – Dan Watkins, Founding Partner

We’ve helped tens of thousands of businesses over our decades of service to the San Diego business community, and we will provide valuable advice and insight as you consider your options and take the actions necessary to bring new money into your company.  Learn more about the 3 legal ways to bring new money into your San Diego business.  We invite you to review our podcast Episode 14 – Shareholders’ Rights as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.