We invested money in a startup biz & the relationship has now gone sour. What are our rights as financial investors?

Asked over 3 years ago - Los Angeles, CA

We initially gave 15k (creator of business has put in 105k and broke the % down as 95-5% with us having the 5). We've put forth a LOT of sweat equity and had more angel investors lined up but the partner thought we were trying to swindle him and basically told us that we are only in it financially. He was not willing to budge on the % breakdown. We haven't spoken with him in a few weeks and i'm wondering, do we have a right to financial statements from the company? The company has yet to make money, but since we're investors, just wondered what our rights were with regard to our invested money since we own 5%. We have the documentation showing the shares purchased/percent owned.

Attorney answers (4)

  1. Robert Jan Suhajda

    Contributor Level 17

    Answered . There is a common law inspection right when the shareholder can show a proper purpose related to their interest. A minority shareholder filed a derivative suit on behalf of the corporation seeking damages for breach of fiduciary duty but also seeking other equitable relief including dissolution of the corporation. The majority shareholder exercised his option under § 2000 of the California Corporate Code, which permits the corporation or a shareholder controlling 50% or more of the voting shares to avoid a voluntary or involuntary dissolution by purchasing the dissenting shareholders' stock for "fair value." If the parties cannot agree on a fair value, then the court is required to appoint three disinterested appraisers.

    Disclaimer
    Although the above response is believed to be accurate, it should not be relied upon as any type of legal advice because the information provided is incomplete. It is intended to educate the reader and a more definite answer should be based on a consultation with a lawyer. No attorney client relation is formed with me without a written contract.

    Good Luck starts with a strategy and a plan.

    Robert J. Suhajda, MS,CPA
    Attorney-At-Law
    17721 Norwalk Blvd. #43
    Artesia, CA 90701
    562-924-8922

    Former financial auditor and controller. Admitted to US Tax Court, Income Tax, IRS representation, Fiduciary income tax returns, Estate and Gift tax returns,
    Homeowner Association Strategist.

    As a strategist, I analyze and integrate the operations, reserve study, budget, and financial statements into a unitary plan for 1 – 5 years, utilizing my experience as
    a former treasurer and vice president of a homeowners' association and corporate
    controller and auditor, to minimize homeowner association dues.

  2. Shawn Regis Jackson

    Contributor Level 15

    Answered . The first series of questions will be surrounding what "role" you are operating in this transactions. Are you a Creditor...and Shareholder...an Owner...and Officer/Director? Each "role" has a different bundle of rights and obligations. I would also assume that you had a written agreement on this money...and the type of supporting document will furhter refine and/or limit/enhance your rights to the money and to the inspection of any financial documents...so, the next step is for you to gather up all of your written communications, select a business attorney and get the next evaluation of your situation...does that make sense to you?

    By Grace...
    Shawn Jackson ESQ.
    Business Development Attorney EMAIL: Attorneys@CaliforniaBusinessDevelopment.com
    (707) 584-4529 www.CaliforniaBusinessDevelopmentAttorneys.com
    No communication resulting herein shall create an attorney-client relationship unless a separate retainer agreement is signed by attorney and client. The information provided is not legal advice nor is it conveyed in the course of an attorney-client relationship, but is intended merely as a general overview with regard to the subject matter covered. You should not act upon this information without seeking professional counsel such as any attorney in this office in a subsequent email communication (agreement) and the formation of an attorney client relationship.

  3. Michael Prozan

    Pro

    Contributor Level 14

    Answered . Yes, shareholders have the right to inspect financial statements under the California corporations code.

    Careful about getting too aggravated here. This guy sounds like he is not ready to take other people's money, especially those of true venture capitalists, who demand a lot of control. For $15K, you are finding this out cheap, instead of after bringing in other folks.

    If you get all this information, what are you going to do with it? You can't force him to take more money for your sweat equity in lining of other angels. And, with what you are seeing now, it would be foolish to bring those people in. A lawsuit over $15K? Not likely worth the fees. You can't force him to listen to you. Consider walking away and be grateful you did not learn this about him after you got other angels into the deal.

  4. Shawn G. Rice

    Contributor Level 8

    Answered . In Wisconsin you may have what is called Dissenter’s Rights.

    Although an agreement between investors/owners may impose certain restrictions to minimize any unwanted consequences stemming from the issuance of shares of stock, it is not possible to limit or eliminate all minority shareholders’ rights under such agreements. Specifically, in certain circumstances, all shareholders (including minority shareholders and holders of nonvoting stock) are entitled to “dissenter’s rights” and certain financial and other information regarding the corporation. Dissenter’s rights in Wisconsin may entitle the shareholders to demand payment of fair value for their stock in the event they do not agree with certain corporate actions. For example, in the event the corporation authorizes the sale of all of its assets and does not plan on distributing the proceeds from the sale within one year, a dissenting shareholder could require the employer to redeem his stock at fair value.

    In addition, you may be owned Fiduciary Duties under Wisconsin law.

    The directors, officers and majority shareholders of a corporation owe a fiduciary duty to all shareholders of the corporation. Therefore, they must consider what is in the best interests of the minority shareholders when making decisions on behalf of the company. The fiduciary duty cannot be waived or limited by shareholder agreement.

    Wisconsin Attorney Shawn G. Rice srice@RBLAWonline.com

Can't find what you're looking for? Ask a Lawyer

Get free answers from experienced attorneys.

 

Ask now

25,933 answers this week

2,768 attorneys answering

Ask a Lawyer

Get answers from top-rated lawyers.

  • It's FREE
  • It's easy
  • It's anonymous

25,933 answers this week

2,768 attorneys answering