The decision to invest in someone else’s business is not one to be taken lightly. After all, putting up money for a business you might not be involved in on a day-to-day basis carries a certain amount of risk, and most entrepreneurs do not leap into such a situation without putting considerable thought into it.
For this reason, the first key consideration for anyone thinking about investing in a business of any size involves taking stock of the risk involved. Evaluating risk is not just a matter of knowing whether you can afford to lose your money—it’s also a matter of recognizing whether there are aspects of the business that may make it more or less likely to be a good investment, or a not-so-good one.
Learn about the business
You probably wouldn’t think too highly of someone who invested money without doing some research ahead of time—and with good reason: smart investment is all about knowing as much as possible about what you’re getting yourself (and your money) into. For this reason, getting information about the business—its finances, its business plan and the people involved—is paramount before making any kind of financial commitment. While this information may be hard to come by for a new startup, it should be readily available for an established business. Any documentation related to a business you’re considering investing in is worth looking over with a knowledgeable attorney.
It also makes sense to discuss the potential investment with other people who might have knowledge about the business, such as other investors, people who have worked with the business or its owners and others whose opinions you trust, such as your attorney or a trusted accountant. There may turn out to be great reasons to invest—or great reasons not to.
Understand your rights
Investing in a business frequently involves little to no hands-on involvement in its operations, which generally translates to little, if any, role in making decisions that impact the direction of the business. However, there may be cases where you’ll want to be more involved and have a greater say—like when you’ve put a substantial amount of money toward the business. If your investment is considerable, you might want to take a more active role, perhaps even by serving on the board. When investing in a business, it’s critical that you understand what that investment entitles you to, and what it doesn’t.
Making an investment in a business of any size should never be something you do hastily. If you are thinking about making such an investment, consult an experienced and knowledgeable attorney who can help you understand the risks and offer the peace of mind that comes with knowing you’ve thought the decision through completely.
BoltNagi is a widely respected and established business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.