Loan payback

Are you a lender or an investor? If you loaned the money you could ask for security, such as a security agreement covering the invention and other business assets, or even a deed of trust on your friends house. However, if you are an investor and expect to receive some of the profits from the development of the invention you are probably not guaranteed a return of your capital or profits. If your situation is the latter, you are typically no more guaranteed a return than you would be if you purchased stock on the stock market. If you are unsure of the nature of your transaction I suggest you contact an attorney in your area with experience in business transactions and arrange a consultation (at which time you should also bring any documents you have that relate to the transaction). Hope this helps.

I agree with the first answer, but wanted to expand it a bit. When lending money, to avoid future misunderstandings and disputes, it is best to have the borrower execute a Promissory Note. That will spell out the terms so that both parties know what their rights and obligations will be. It should include the amount loaned, an interest rate to be charged (consult your accountant, as the IRS may impute a minimum rate, even if you want to do an interest free loan), the terms of repayment, if the note is prepayable without penalty, and what happens if the borrower defaults. Alternatively, if you believe in your friend's invention and are hoping to enjoy part of the profits it may generate if it succeeds, you are acting more like an "angel" providing capital so your friend can grow a business. For that it is best to form a company or other appropriate legal entity into which you would invest your money in exchange for equity, in the form of shares, or other ownership units. Under that scenario, you are not entitled to the return of your investment if the company fails, but you enjoy the upside potential of profits generated by the invention! To protect your investment and to clearly spell out the rights and obligations of the owners of your and your friend's company, you should consult a qualified business lawyer in your state to prepare a Shareholders Agreement (corporation), an Operating Agreement (for an LLC), Partnership Agreement (for a partnership), or other documentation of the relationship of the owners. This document explains who makes decisions for the company, how an owner can transfer his interest, what happens if an owner dies or is disabled and other important matters. It is better to spend a little money at the beginning of a new venture than to be faced with a dispute at a later date and find yourselves without the legal protection of proper documentation!

Investing in a startup is risky business -- even if you are making a loan versus taking equity in the company. Therefore, you should always consider your money at risk if you make an investment into a startup company. There is really no way to "guarantee" anything when it comes to a business that has a relatively low likelihood of becoming a big success.

However, I think there are really two important things here to protect your investment.

(1) Get to the front of the line. This means you need to structure your investment in such a way as you receive an interest in the assets of the startup or in the personal assets of your friend.

(2) Be active in the company. If you can take a role in the company as a board member, executive or adviser, you may be able to help ensure that your friend makes decisions in the best interest of you as an investor, as well as in the company.

In the end, remember that you should be an accredited investor to purchase any security that is privately issued (such as a promissory note in a startup company). Check with a lawyer to be sure that your investment complies with Federal and Washington securities laws. Good luck.