Startup Dox

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Ask a Lawyer:How to Pick a Business Partner

Dear Startup Dox:

My friend/family member wants to invest money into my company* in return for ownership. I am so grateful but unsure if I should take the money and confused on how to start the process. What should I do?

Signed,
Grateful but Confused

  1. Why this matters: Knowing this can help you build your team that is also invested in your mutual Profit. Everyone has the same goals. Business/Tax/Legal work in tandem and are NOT mutually exclusive for next steps and liability. It will also help you figure out who will be a good addition to your team because of their unique contribution.
  2. What you need: Business goals/plan for next 12-24 months
  3. Who you need: Business Attorney / Accountant
  4. Apply here/What’s Next: Partnership Agreement
  5. Learn more here: MC: CINC
First of all, congratulations on having someone have faith in you and your company to offer money for its growth! This simultaneously makes us excited for your company’s success and…hyper-aware for your relationships. Simply because this isn’t a simple transaction of money in exchange for ownership. It’s about building a sustainable business.
Building a sustainable business really means building sustainable relationships that share the same goals.
While it’s sweet to be offered investment from a loved one (or relative acquaintance) it’s freaking fantastic to have someone who shares the same vision for the actual GROWTH of your company. Identifying if investment is right for you can be done in a 3 step process:
STEP 1: ALWAYS START WITH YOUR GROWTH VISION

FIRST.
Start with your plans for your Company.

  • How does that investment fit into your current business plan for the next 12-24 months?
  • Do you absolutely NEED the investment now for your CURRENT situation OR is it just nice to have as a cushion for FUTURE business dealings?
  • Can you gain or make up that investment in another way?

If you do not need the money immediately for your current plans in the next 12-24 months; or it is not absolutely necessary; or you can gain that investment another way, then decline or delay the investment offer. But…nurture this investor relationship for the future.

If you’ve decided that you need this investment now, then proceed to Step 2 for the EQUITY VALUE TEST.

STEP 2: ASK THE POTENTIAL INVESTOR, “EQUITY VALUE” QUESTIONS.

Equity means “voice” or “vote” in the ownership of business. When someone invests anything into a business, they’re generally allowed a voice in the direction of the business.
Bear the following in mind:

People generally run their businesses the way they run their personal lives.

People also can change when they MAKE money and when they LOSE money, if they do not share the same growth vision.

It is harder to take BACK equity than give it away.

It stands to reason that you need to know your potential partner/investor’s life and business acumen before you bring them on as part owner. As you would be entering into “business marriage”, you want to know the motivations and hopes for that union…before you invested ANY money, time and energy together.

Determine your potential investor’s “Equity Value” as a partner with these questions::

RATSM- EQUITY VALUE TEST(™):

  1. Resources – What resources do you have access to share? Do you have a contact list of potential partners or customers that would benefit from our company?
  2. Alignment: Vision: What do you see as the final exit for the company? Vote: Will you want to have a vote or say in the company’s growth, should you invest?
  3. Time – Will you be actively involved with the business in the day-to-day operations or processes for the next 12-24 months? Is there a commitment of X hours per week in addition to the money?
  4. Skills – What skillset(s) do you have that would be beneficial for the company?? Do you have expertise that would GROW this company?
  5. Money – Will you be able to commit $X dollars every year to add to your investment or will this be a one-time shot?

(Yes money is last because it’s the least valuable of all. Once it runs out, the value runs out).

If you are satisfied with the answers from 4 out of the 5 Equity Questions, then proceed with equity investment after discussing it with your Attorney and Accountant.

If you obtain 3 or less satisfactory answers, revisit this investment in 6 months OR take out a business loan from the investor (who will now become a lender instead).

STEP 3: BRING IN THE PROS.

Complete either process by having your business attorney draw up partnership/investment documents OR loan documents, and your Accountant to discuss the tax ramifications of splitting your equity OR being a debtor to a lender.

Whatever path you choose, Ms. Grateful, remember that they want something from you. It’s always your right to maintain your company boundaries to protect your vision and stay TRUE to it.

*Company means incorporated entity with your State, such as an LLC or Corporation. Business means UNincorporated entity such as a sole proprietorship or partnership.

ACTION STEPS TO APPLY Now:

1. Take a look at your current Goals for the next 12-24 mths.

2. Define the Skills and Resources you will need for the next 12 months

3. Define the PARTNER you would need that have those skills or have those Resources.

Startup Dox CEO & Lead Attorney
Sankeetha Selvarajah, ESQ

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