The decision to attract a new investor or partner carries substantial opportunity for growth and expansion, but it also carries substantial risk.  A new partner or investor can bring valuable skills to compliment your own, and the existing leadership team of your business.  We can’t be all things to all people, and each of us has areas of strength and weakness.  It is important to be able to entrust the areas of your business that are outside of your core strength, so that you can focus all of your skill and expertise on business success within your areas of strength.

Risks and Important Issues with a New Owner or Investor

The risk a business owner takes when they decide to bring in a new investor or partner lies in decision making and corporate control.  Most investors want a piece of the company, and many want a substantial piece.  As a business owner, you want to make sure they are well compensated for the money they are investing without allowing an aggressive outsider to wrest control of your company.  Many hostile takeovers are disguised as business partnerships or investments.  There are several sound legal strategies that allow you to bring in an investor or partner without giving up potential control of your LLC or corporation.

Another substantial issue to consider is the modification of your operating agreement (LLC) or shareholder’s agreement (corporation).  How will the decision to attract a new investor or partner affect these crucial corporate documents?  Will you give them stock in your corporation, and will they be voting shares?  If your company is an LLC how will the new “member” be positioned in terms of profit sharing and voting?  This is usually an excellent opportunity to update important clauses within these agreements to ensure that they reflect and enforce your intentions for your company.

Pro-Tip: “Well, first of all, let’s be clear. We’re talking about privately held companies. Yes. 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.” – Dan Watkins, Founding Partner

The Watkins Firm can Help Attract a New Investor or Partner to your California Business

The Watkins Firm has over 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California. When you bring in a new investor or partner you infuse your business with additional energy, life, ideas, opportunity, perspective and strength.  This is the foundation of many growth strategies for small to mid-sized businesses.  If you think it is time to attract a new investor or partner 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.

We will discuss your goals for the situation, and how the new investor or partner fits into your company.  We will provide a sound budget for the work that is necessary to capture your agreements, and draft or update all associated documents.  The Watkins Firm will always protect the interests of our clients, and help to ensure that they protect themselves from all potential risk – seen or unseen – while positioning them to grow and prosper.