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Can your friend invest in your business for equity?

Santa Clara, CA |

Can a friend (who is not an accredited investor) invest in my business for equity? Is there anything I have to be extra careful about in terms of legality?

Attorney Answers 4

Posted

If you are proceeding under an exemption from registration and have not surpassed the number of permitted investors then probably yes. You should also consider having a buy-sell agreement when the owners are not related by blood or marriage (and even then it is often a good idea.) Know that "fraud" under securities law includes not only misrepresentations but also failures to state a fact which an investor would have wanted to know when making the investment.

Generally, all aspects of your business will benefit from having a lawyer who knows you and you busienss on standby for the regular series of legal questions which arise for every business.

This is analysi, not advice, and any lawyer would want to know the history of your stock issuances, the status of your corporate records, a better understanding of your finance and other business goals.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

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Posted

Anybody can invest in a business for equity, so long as the business grants the investor equity. Your friend can do so in a number of ways, depending on the choice of entity of your business as well as the type and value of assets in the company.

For instance, if your company is held in the form of a corporation, then your friend can purchase shares in your company in the the form of stock. Similarly, if your company is held in the form of a limited liability company (LLC), then you can add your friend as a member in the LLC, and update the operating agreement to reflect his/her equity stake.

If you do not have a separate entity forming your business, then you can enter into an agreement with your friend giving him/her an stake in the sale of assets, or proceeds from profits derived from the business.

These represent just a few of your options. Please feel free to contact me off-line to discuss options in further detail.

victor@looklawfirm.com

The opinions published on this forum should not be construed as creating an attorney-client relationship for any purpose, and is intended only for providing informal preliminary information to a legal inquiry. Victor Look - 818-444-1779

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Posted

Your question sounds simple, but there is quite a lot of high level complexity depending on what kind of business you own and the structure of the business. By and large, with the advisement of legal counsel, it certainly should be possible that your friend can invest in your business for equity. If your business is a corporation, there can be limitations on who the stock can be sold to, and there can be a number of different financial qualifications. Depending on the form of your business entity, it will really dictate the specific answer you need to receive in regard to your proposed sale of an equity share in your company. These questions can be easily answered by an attorney who knows your specific facts.

If you have found this information helpful, please let the attorney know by marking best answer. Thank you. This participating Attorney does not warrant any information provided, nor are we creating an Attorney-Client relationship by providing said information to you on this site. Nothing contained herein is intended to constitute, offer, induce, promise, or contract of any kind. The content provided is presented as a courtesy to be used only for informational purposes and is not represented to be error free. The Law Offices of John N. Kitta makes no representations or warranties of any kind with respect to its answer to inquiries, and such representations and warranties are being expressly disclaimed. Given limited facts, we are attempting to share relevant information concerning this area of the law as a public service.

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Posted

I agree with my colleagues and will add the following:

"Friends and family" are a frequently-tapped source of investment funds for small businesses. As my colleagues have noted, both the investor and the entrepreneur / business need legal representation to make sure that everything is done properly.

This information does not constitute legal advice and does not establish an attorney-client relationship.

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