What Restrictions are there to Offering Ownership Interests to Investors?

In Contracts, Startups by Don KochersbergerLeave a Comment

Ownership Interests to Investors

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In the business world, most ventures are formed with the idea that those involved have a personal investment in the company they formed. Each founder has put some sort of equity into the business, whether it is through funding, labor or intellectual property.

So, what happens when one owner decides that they want to sell their interests in the business, or the company just wants to sell new interests to raise additional capital? And what kinds of restrictions are put on these types of transactions?

Variables to Consider When Selling Your Interests to Matters

There are a lot of reasons why people think about selling their ownership interests. They might be thinking about starting a new business or moving out of state. These situations occur and, while it is common, there are variables that an individual must consider when selling.

When selling ownership interests, consider:

  1. The other owner(s) may not want to go into business with the person that you are thinking of selling to.
  2. Know what the terms of the sale are and how your interests are valued.
  3. The person or group to whom you are selling your interests might own the majority of the company after the transaction is complete.
  4. The other owner(s) of the company may choose to buy you out instead of letting your interests go to another group.

These variables are important to consider when thinking about selling your interests to an outside group. Knowing the value of your company, your interests and the wishes of your partners can help you decide how to proceed.

There are Restrictions to What You Can Do

Due to the amount of variables that can be present during the sale of ownership, the state and federal government places restrictions on what you are able to do. State laws vary, but:

    • There are rules for soliciting your interests to the public
    • The rules can differ depending on the type of entity involved
    • You may need to file disclosure forms

Navigating state and federal law can be difficult to do when you are deciding the ownership and overall fate of the company. A business lawyer at Business Law Southwest can help you determine what you can and cannot do, according to the law.

What You Can Do to Prevent Disputes

More often than not, selling ownership interest in a company can deteriorate relationships between owners quickly. Avoid this uncomfortable situation by having an agreement in place from the beginning. An ownership agreement can dictate:

    • How much each person’s equity is worth
    • Each person’s day–to-day role in the company
    • How you will determine the company’s value if you decide to sell
    • An exit plan, just in case one person wants to sell their interest

Most importantly, these agreements can allow you to decide the destiny of your company and leave it out of the courtroom. These agreements can be drafted by our lawyers to ensure legality and to help avoid a long, expensive litigation process later on down the road.

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