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Investing in a Business - What do i need to know?

Updated: Mar 3, 2021

What is an Investment?

Investments are something you buy or put your money into to get a profitable return.

Most people choose from four main types of investment, known as ‘asset classes’:

  • Shares - you buy a stake in a company

  • Cash - the savings you put in a bank or building society account

  • Property - you invest in a physical building, whether commercial or residential

  • Fixed interest securities (also called bonds) - you loan your money to a company or government

You invest money in the business in exchange for a portion of their equity, meaning that you buy shares in their business. If a business that you have invested in succeeds, the shares that you own will become worth more than what you paid at the time of your investment and you may be able to sell them at a profit or receive dividend payments in the future. However, if the business fails, you will lose some or all of your investment which is generally the case.

Our Business and Commercial Solicitors have acted for various clients in ensuring that the appropriate documentation is in place regarding their investment in a business. An investor will always fear whether they will be able to get a return back on their investment. Our specialist fixed fee lawyers have dealt with numerous transactions ensuring that the appropriate documentation is in place so that where the business does not succeed, there is usually an exit option for the investor to recover their money.

Points that you should consider when investing in someone else’s business:

1. Don’t be “sold” investments;

2. Do request a Business Plan from the business;

3. Calculate your downside risk;

4. Consider the tax consequences;

5. Ensure you maintain your position i.e. get what is best for you;

6. Make sure the risk is for both parties i.e. the Business and yourself;

7. Do it right – make sure you have paperwork in place.

8. Keep copies of all documents;

9. Ensure there is an option to get a return on your business;

10. Don’t invest money that you can’t afford to loose

11. Invest carefully – be responsible.

What are the main risks in investing in a business?

There are three broad types of risks when investing in early-stage and growth-focused businesses. The first is that the business will simply fail or even if it continues to survive it may eventually fail and you may not get your investment back.

Second, even if the business succeeds, your investment is likely to be illiquid. This means that your investment will be tied up in the business for a long time while the business continues to grow. Further, in this situation you may not be able to sell your shares in the Company if you wish to do so and will also not receive any dividends in the early years of the business even if it does turn out to become a success later on.

Finally, there is the risk of dilution. If the business raises more capital later on (which most successful start-ups need to do), the percentage of equity that you hold in the business will decrease relative to what you originally had. Dilution in itself is not always a bad thing but it is something of which you should be aware.

What is an Investment Agreement?

An investment agreement deals with the subscription for shares by the investor(s) in return for the investment monies. The investment agreement should bind all investors participating, including any separate funds that are investing.

The purpose of the Investment Agreement is to set out a formal contract between the Investor and the Company. It will deal with all principal obligations such as a management of the company and the Investor at the time the investment is made as well as ongoing obligations for the of the investment.

In transactions of such nature and where clients are investing a substantial sum in the business, we always advise that you should have the appropriate documentation in place. This is to ensure that your investment is protected and that you have an exit option in the event that the business does not grow or succeed as expected.

Specialist Business and Commercial Solicitors

How can Pure Business Law help?

We are specialist business and commercial law solicitors based in Bedford and operating nationally. If you are an investor looking to invest in a business or a business looking to take on an investment, contact us today and speak to one of our specialist business solicitors.

Whether you need us to carry out the appropriate due diligence checks for your investment or whether you would like us to prepare the appropriate documentation i.e an Investment Agreement, we are here to help. Our fixed fee lawyers have an average of over 20 years’ experience in transactions of such nature.

Our Specialist business lawyers do not just deal with due diligence and document preparation – we also deal with investment disputes. We have dedicated dispute solicitors than can advise you on various issues eg options of how to recover your investment if you have been scammed or if you are in dispute with your investment company.

If you would like to discuss anything in relation to the above or any other issues relating to an investment matters, please contact us and speak to of our specialist fixed fee solicitors. Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.

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