IT’S ALL ABOUT CONTROL. Estate Planning vs. Succession Planning

We recently had a death in our family, and as a business owner, it has made me stop and think.  Being an attorney, I know the importance of estate planning.  My husband and I have our documents in place to take care of our children and our property if something were to happen to us.  This was done before I was a business owner.  Now, there is an added layer I need to consider, and I’ve recently stopped to think about what happens to my business upon my death.  Because this topic is so important to small business owners, this post gives an introduction on what small business owners need to be thinking about.

ESTATE PLANNING VS. SUCCESSION PLANNING

There’s a difference between estate planning and succession planningEstate planning deals with your personal will, trusts and advance directives – which address your personal property upon your death (and some other end-of-life medical issues).  Estate planning does not necessarily address the continuation of your business.

Here’s how it works.  If your small business is a corporation or an LLC, your ownership in that business entity (stocks or interest) needs to be considered in your estate planning documents.  For example, if you own a corporation, your stock in that corporation can be passed to your heirs in accordance to the directions in your will.  Estate planning determines who gets ownership of your property when you die – and the corporate stock or LLC interest in your business is a part of your property.  If you are a sole-proprietor, your business assets are your personal property and will be passed according to your estate plan.

Succession planning, on the other hand, deals with how your business carries on after your death.  It can, but does not have to, deal with who owns the business after your death.  But the reality for small business owners is that succession planning often does involve an ownership component.  Having a succession plan means that the business has a way to continue operating after the death (or retirement) of its top manager (or one of the top managers).  For small businesses, the top manager is often the owner.
This is the reason why estate planning and succession planning should be considered together for small business owners.   There are several scenarios for how this usually plays out:

#1           Heirs Manage.

When we refer to “heirs” we usually mean whoever is named in the will (or sometimes a trust) as the new owner of the property.  In this scenario, the business owner dies and her ownership in the business is passed to her heir or heirs through an estate plan. The heirs in this case have the ability and desire to step in and manage the business to keep it going.  If the heirs were not previously involved in the business, there could be a significant learning curve and a period of decreased revenues as a result.  Thus, the succession plan in this scenario may or may not be adequate to keep the business thriving, depending on the qualifications and knowledge of the heirs.

Estate Plan = Ownership of business is left to heirs.

Succession Plan = Management of business will be taken over by heirs.

#2           Heirs Sell.

In this scenario, the business owner dies and his ownership in the business is passed to his heir or heirs though an estate plan.  However, his heirs do not have the desire or the knowledge to manage the business and they want to sell it.  Often, a business broker is enlisted to help sell the business to a new owner.  While this scenario can bring in cash to the heirs upon the sale, there is often a decreased value in the business due to the time lapse between the business owner’s death and the purchase by a new owner.  There can also be a resulting decrease in business value if the business was heavily reliant upon the personal skills of the deceased business owner and/or procedures were not documented for someone to easily step into his shoes.  If the business cannot be sold within a certain amount of time, the heirs are usually forced to shut down the business and they consequently lose the value of that property.  This is a worst-case scenario for any business owner who has worked hard to grow their business and create financial security for their family.

Estate Plan = Ownership of business is left to heirs.

Succession Plan = None.

#3           Co-Owners Manage.

If the business is owned and managed by more than one person, the co-owner(s) can continue the management of the business.  The deceased owner’s ownership interest can still be passed through her estate plan to her heirs, but the heirs do not have to manage the business to keep it going.  The co-owners carry on the business and the heirs receive any profit distributions that are paid out.  This is a scenario that often happens when co-owners of a business have a close personal relationship with each other.  Upon the death of one, the others are willing to work in the business and be business partners with the heirs.  With relationships that are not that close, this scenario does not end up working very well.  The surviving co-owners can sometimes feel imposed upon for working longer hours, having more responsibilities and/or having the added expense of hiring someone to pick up the deceased owner’s duties.

Estate Plan = Ownership of business is left to heirs.

Succession Plan = Co-owners carry on management.

#4           Co-Owners Buy.

In this scenario, when one of the business owners dies, his ownership in the business is passed through his estate plan to his heirs.  Either the heirs or the surviving co-owners (or both) don’t want the heirs to be owners of the business. The co-owners buy the ownership from the heirs – usually through a pre-arranged agreement called a Buy-Sell Agreement.  The price and terms of the buy-out are already established, and upon the death of one of the owners, the process just needs to be followed.  The heirs receive a payment, and the co-owners maintain ownership of the business.  The timing of this scenario is relatively quick so that the impact on the business is minimal.

Estate Plan = Ownership of business is left to heirs.

Succession Plan = Buy-Sell Agreement.

While the four scenarios above are outlined in a very general sense, for service professionals like me who are licensed or require specialized knowledge to run their businesses, there is an added layer of complexity.  As I am discovering, it is best to take the time to think about a succession plan along with your estate plan.  Getting all of the details planned out in advance can alleviate the stress on your heirs during a time when they will be grieving.

Keep in mind, you don’t have to recreate the wheel – there are professionals who can help you through this process. A business attorney, an estate planning attorney and a business broker all deal with these issues on a regular basis.  Reach out to one and ask how you can get started.  You’ll feel better once it’s done … and you’ll be in control.

About Elevate: Small Business + Technology Law

Small business owners have many hats to wear and their to-do lists are miles long.  At Elevate, we provide quick and easy resources so that business owners can get the information they need to make better decisions and protect their business.

This blog post is offered for informational purposes only and is specific to Florida law. For individual advice, please contact a business attorney to discuss your particular needs. 

The Break-Up: How to Keep it Simple

What happens if your business partner comes to you and says he wants out of the business?  What if he demands that you buy his interest in the company?  What can you do if he’s demanding an exorbitant amount and you can’t pay it?

These types of situations (and more) are handled in what we call “Buy-Sell” provisions.  These types of provisions can be in a stand-alone Buy-Sell Agreement or more commonly, they are part of an Operating Agreement (for an LLC) or a Shareholders’ Agreement (for a corporation).  The title “Buy-Sell” describes its purpose – to provide for those situations where an owner can buy interest or sell interest in the business.  The goal is to have a straight-forward plan already in place so that there is minimal disturbance in the business if one of these situations occurs.

If you have an agreement with Buy-Sell provisions and your business partner says she wants to be bought out, it’s a simple process of following the steps in the agreement.  Here are some of the more common steps we see in Buy-Sell provisions:

  1. If a business partner wants to leave the business, she must give notice to all of the other owners.
  2. The other owners have a certain time period to decide whether they want to buy the leaving partner’s interest in the business.
  3. The purchase price for the leaving partner’s interest is already determined in the Buy-Sell provisions.
  4. The payment terms are also already determined in the Buy-Sell provisions – and they can include payments of the purchase price over time.
  5. If the other owners decide not to buy the leaving partner’s interest in the business, then the leaving partner is free to sell her interest to someone outside of the business.
  6. If the leaving partner cannot find someone outside of the business to buy her interest, then the leaving partner remains as an owner of the business.

The purchase price can be set in the Buy-Sell provisions as a set price, or it can be determined using a defined formula (such as a multiple of EBIDTA), or it can be required to be determined by a certified business appraiser.  In any event, the purchase price is provided for in the Buy-Sell provisions and there does not have to be any negotiations.

Same is true for the payment terms.  If an owner wants to pay the purchase price and buy the leaving partner’s interest in the business, then the payment terms are pre-determined.  Usually, the terms provide that a certain amount is paid up front and the remainder is paid over time.  A promissory note is required to document the unpaid balance.  Of course, the full amount of the purchase price can be paid at any time.

The result is that the leaving partner walks away from the business and receives the purchase price, either in full or in payments over time.  The remaining owners stay in the business and carry on without the leaving partner.  The goal of the Buy-Sell provisions is to have as minimal impact on the business as possible by providing a clear path forward.

It’s very good business practice to have Buy-Sell provisions in place long before you think you’ll need them.  Once a business partner starts having thoughts of leaving the business, it is too late to put these provisions in place.  Most business owners want to maximize the purchase price of their interest and therefore tend to overestimate the value of the business, demanding a sum so large that the remaining owners can’t afford to buy it.  Usually, the owners are emotionally involved and have a hard time being objective and pragmatic in these situations.  Having Buy-Sell provisions already in place avoids the difficulty of negotiating all of the terms during a period when emotions are likely running high.

Buy-Sell provisions also usually cover situations involving the:

  • Death of an owner,
  • Divorce of an owner (a spouse may have some rights to the business),
  • Personal bankruptcy of an owner,
  • Disability of an owner who provides services to the business,
  • Retirement of an owner, and
  • Termination of an owner as an employee.

In these situations, the ownership of that owner’s interest in the business may need to be transferred.  The Buy-Sell provisions again step in to provide the straight-forward steps to deal with it.

Having Buy-Sell provisions in place is important – for new businesses and existing businesses.  Ideally, it’s put in place when the business is started, but it is not too late for existing businesses to get an agreement in place.  Business owners should consider it one of those proactive steps that can help to eliminate potential problems in the future.

About Elevate Business + Technology Law

At Elevate Business + Technology Law, we help small business owners get the support and guidance that is so critical to successful businesses.  We offer a transparent and practical approach to providing legal services.

This blog post is offered for informational purposes only and is specific to Florida law.  For specific advice, please contact a business attorney and discuss your particular needs.

 

 

Ownership Changes Part 4: Key Terms

In the final post in this series, we’re going to discuss some key terms in an ownership agreement – called an “Operating Agreement” for an LLC or a “Shareholder Agreement” for a corporation.  One of the most important reasons owners of a business want to have an ownership agreement is to set out the procedures for how and when an owner can sell his or her interest in the business.

 

No one wants to own a small business with someone they don’t know.  That could happen if one of the owners decides to sell his or her interest in the business to someone else.  Without an ownership agreement, there’s really nothing to prevent that from happening.  From the perspective of the remaining owner, this situation can be quite scary.

 

On the flip side, from the perspective of an owner who wants to get out of the business, it can be too restrictive if he or she is not allowed to sell the interest at all.  For example, after years of building a successful small business, one of the owners could decide to move on to another project or to retire.  Without the ability to sell his or her interest, the owner would be stuck in the business indefinitely.

 

Neither of those situations are acceptable for most business owners.  That’s why it is important to have the following provisions in an ownership agreement.  These provisions strike a middle ground that allows for an owner to sell his or her interest in the business under certain circumstances but also allows the remaining owner to have some control over who can purchase that interest.

 

Situation:  An owner wants to sell his or her interest in the business.

Problem:   The remaining owner may not know or like the person buying the interest from the departing owner.

Solution:    Have a provision in the ownership agreement that allows for an owner to sell his or her interest under certain conditions (i.e. the company and/or the remaining owner have the right to purchase the interest before any other third party).

 

Situation:  An owner gets divorced.

Problem:   Sometimes a spouse has indirect ownership rights in the business.  During the divorce process, the business interest could be divided up between the owner and his or her ex-spouse, or the business interest could be completely allocated to the ex-spouse during the division of assets.

Solution:   Have a provision in the ownership agreement that keeps the interest in the hands of the owner (i.e. the owner and/or the company have the right to purchase the interest from an ex-spouse).

 

Situation:  An owner dies.

Problem:   Upon the death of an owner, his or her ownership usually passes to his or her heirs.  The remaining owner could end up co-owning the business with the deceased owner’s spouse, children or extended family.  For the deceased owner’s heirs, it may be burdensome to own a business and they may not want the interest.

Solution:   Have a provision in the ownership agreement that allows the company and/or the remaining owner to purchase the deceased owner’s interest from the heirs.

 

Situation:  An owner who is active in the business becomes disabled.

Problem:   The remaining owner is left with the burden of running the business.

Solution:   Have a provision in the ownership agreement that allows the company and/or the remaining owner to purchase the disabled owner’s interest.

 

Situation:  An owner is involved in bankruptcy proceedings.

Problem:   An owner’s interest in the business could be transferred during bankruptcy to one of the owner’s creditors or it could be sold to pay the owner’s creditors.

Solution:   Have a provision in the ownership agreement that allows the company and/or the remaining owner to purchase the bankrupt owner’s interest.

 

Most of the solutions discussed above are more complex than they seem.  To achieve the proper balance, the language in the ownership agreement must be specific and at the same time allow for variances in the situation that may arise over time.  There also needs to be provisions for the amount of the purchase price, the timing of the closing and deadlines for getting the deal finalized.  All of these types of provisions are called “buy/sell provisions” and business owners should seriously consider getting an ownership agreement in place to address these situations.

Ownership Changes Part 3: Promoting an Employee

This is the third post in a series about the legal and technical ways that a new owner is added to a business.  The first post addressed onboarding an investor and the importance of getting an agreement in writing.  The second post talked about adding a true “partner” to your business – someone who is going to be helping you with the management of the business.  This third post is going to talk about offering a valued employee an ownership piece of the business.

 

In the past few years, I’ve seen more and more small business owners talking about offering ownership to one or more of their employees.  It’s great that business owners recognize and value their employees who are committed to helping their businesses grow – and they want to reward them (and keep them motivated) with a piece of the pie.  But giving employees (or allowing them to buy) some ownership in the business is more complicated than business owners initially realize.  It’s actually the most complicated way to add an owner to the business.

 

That’s because there are specific laws that protect employees – on both the state and the federal level.  So not only do you have the normal requirements for adding an owner, you now have additional ones to consider.  This post is going to discuss some of the issues you’ll need to understand if you’re wanting to offer a valued employee a piece of your business.

 

First, let’s consider how the employee is going to receive the ownership.  Will it be “given” to them or will they have to pay for it?  If a percentage of ownership (LLC) or shares (Corporation) are “given” to an employee, they are usually considered as compensation for the services the employee provides.  Which means that the value of that percentage or those shares could be subject to employment taxes – and the determination of that value could be really hard to determine (and sometimes expensive!).

 

If the employee is going to buy the percentage or shares, then what should be the purchase price?  Again, you run into the valuation issue – what is your business worth?  With the state and federal requirements, business owners need to be careful about overvaluing and undervaluing the ownership interests.  There are deep pitfalls with those requirements for business owners who do not comply.  So it gets to be a tricky balancing act when determining the purchase price.

As for payment of the purchase price, the same considerations apply that were discussed in the second post in this series.  If the employee is not able to pay the entire purchase price in one lump sum, then some kind of promissory note needs to exist to document the obligation to make payments.  And what if one or more of those payments are not made?  What happens to the employee’s ownership in the business?

 

OK, now let’s take it a step further.  Let’s say the transaction is complete and the employee owns a part of your business.  What kind of management decisions is the employee going to be able to make? What if the employee quits or gets fired – can they keep the ownership?  If not, how does it revert back to you?  What if the employee has an accident, becomes disabled and can no longer work?

 

These are issues that should be dealt with in a contract between all of the owners – an operating agreement (LLC) or a shareholder’s agreement (Corporation).  This contract should always be in writing and signed by all of the owners.  It is a critical part of the structural integrity of your business.

 

Unfortunately, many times small business owners decide in the end that promoting an employee to an owner is too complicated to pursue.  As a practical matter, there are alternatives to offer a valued employee that do not involve sharing the ownership of your business.  If you are looking for ways to reward or motivate an employee, seek the advice of an experienced business attorney before making any moves.  Some of those state and federal laws protecting employees can be quite complex.  And, as always, whatever you do – get it in writing!

Ownership Changes Part 2: Adding an Owner

This post is the second in a series addressing the legal and technical ways that a new owner is added to a business.  In the first post, I stressed the importance of getting an agreement in writing.  Although I discussed this in relation to a new investor, the importance of getting an agreement in writing applies to any kind of a new owner.  Get it in writing!

 

In this second post, I’ll talk about adding a “partner” to your business – someone who will be involved in the management of the business with you.  Maybe you’re considering a partner who has resources that will help you grow your business. Or maybe you’re thinking about bringing someone on board who can help you manage the business so that you’ll have more time to focus on the big picture.  Or maybe you’d like to have someone associated with your business because he or she has beneficial contacts and a reputation for making things happen.

 

In any event, you’re going to be sharing your business with a new owner.  You’ve made the decision, you’ve talked it through with the new owner and you are comfortable moving forward.  You and the new owner have agreed on how things are going to work – generally.  After doing this for over a decade, I’ve realized that most people don’t know all the things they need to talk about with the new owner.  That’s understandable – you talk about the things you can think of.  Unless you’ve taken on a partner a couple of times in the past and have had some troubles, you wouldn’t know all of the things you need to iron out first.

 

So here’s some key points for you to discuss with the new owner:

 

  1. If you have an existing operating agreement (LLC) or shareholder agreement/bylaws (corporation), both of you should read it to see if it will still work. Chances are, it won’t.  That’s because it was probably written before you contemplated taking on a new owner.  If it won’t work, you can either amend it or write a new one.  If you don’t have an existing agreement (maybe because you’ve been the only owner), you absolutely now have to have one.  The posts in this series discuss why it’s so important to get an agreement in writing.

 

  1. How is the new ownership going to be transferred? Will it come from the business or will a current owner be selling some his or her own interest?  If it will come from the business, the business will “issue” the interest directly to the new owner and the new owner will pay the purchase price to the business, to be deposited into the business’ account.  If a current owner is selling some of his or her own interest, the new owner will pay the current owner and the purchase price will be deposited into the current owner’s personal account.  Before you decide, consider whether the business needs the influx of cash.  Also consider the tax implications of each way and discuss this with your accountant.

 

  1. How will the purchase price be paid? If the new owner can pay the purchase price all at one time, then great.  If he or she can’t, then you’ll need a promissory note showing the amount owed and the payments to be made over time.  Additionally, there should be some security for the note, so you’ll need a security agreement stating what happens if the note does not get paid.

 

  1. How much management authority will the new owner have? What is the procedure for making decisions?  Are you splitting it up so that each of you will have decision-making authority over certain aspects of the business?  For “major decisions,” will both of you have to agree?  Keep in mind that it is very difficult for people to agree all of the time.   You don’t want your business to stagnate while you’re trying to hash it out with your partner.  Think of ways to keep things flowing.  Work through which of those decisions are so important that all owners to have to approve – but keep these to a minimum.

 

  1. What will the new owner’s title be? These days, titles aren’t that important to us. But in the law, titles come with authority.  If you have a corporation, will the new owner be on the board of directors?  Will they have an officer title?  If you have a manager-managed LLC, will the new owner be a “manager”?  This decision fits in with the topic in #4 – management decisions – because each of these positions has certain decision making authority.  That authority should be well defined in your operating agreement (LLC) or in your shareholder agreement and bylaws (corporation).  And don’t forget to update the information with the Florida Division of Corporations.

 

  1. Will the new owner be an employee of the business? This one is tricky.  If the new owner will be paid a salary (in addition to a share of the profit), you need to have provisions in your agreement that covers his or her duties as an employee.  The reason it is tricky is that an owner does not have to be an employee.  Let’s say that a new owner doesn’t perform well as an employee – or that the new owner doesn’t put in the necessary time – and you no longer want to pay his or her salary because it’s a drain on the business.  What can you do?  Can the new owner be fired?  If you fire the new owner (because it says you can in your written agreement), can he or she still be an owner of the business or does he or she have to sell the ownership interest back (and at what price)?  These are all things that should be set out in your written agreement.  It’s much easier to address at the beginning than it is to deal with the uncertainty and arguing that can happen later.

 

  1. If (notice I say “if” and not “when” because I’m an eternal optimist who plans just in case things go wrong) – if things don’t turn out well with the new owner, can the new owner take the information they’ve learned from you and set up a competing business? Your answer should depend on whether the new owner already had the ability to compete before joining your business.  If you feel it’s appropriate, consider putting a non-compete clause in your written agreement – but remember, Florida has restrictions on the length of time and geographic area for non-compete provisions.  Non-compete restrictions are not appropriate in every situation.  However, you can always have a confidentiality provision, so that if the new owner does go his or her own way, he or she cannot use or disclose your customer lists, business processes, trade secrets, and other information you define as “confidential”.  You can also have a non-solicitation provision so that the new owner cannot solicit your customers, vendors or employees.

 

As I stated in the first post in this series, there are securities laws that must be considered when adding a new owner to your business.  These do not only apply to investors – they apply to all types of new owners.  You may need to take certain actions to comply with these rules.

 

The next post in this series will address issues you need to consider when you promote a valued employee to an owner of your business as well as more suggested terms you should have in your written agreements.

Ownership Changes Part 1: Taking On an Investor

With One Spark 2015 just around the corner, it’s a good time to think about what it means to add an owner to your business.  Whether your business is an LLC or a corporation, the issues you need to consider are the same.  Taking on an investor, partnering with someone new, or promoting an employee to an owner is a big step.

 

Thinking about all of the possibilities and opportunities that One Spark offers to new and expanding businesses, I realized that most people don’t know about the legal and technical ways that a new owner is added to a business.  This post is the first in a series that will address the issues you need to consider when you welcome a new owner to your business – whether it’s an investor, someone with skills to help your business grow or a valued employee.

 

First of all, the most important thing to remember is that you need to have an agreement IN WRITING!  I know, you’ve heard this before, over and over and over.  But it’s that important.  If you don’t have an agreement with the new owner in writing, it could be devastating to your business.  You would be surprised at how many people know this but they don’t do it – smart people, business savvy people – it’s easy to get caught up in the moment and forget (or ignore) this very basic requirement.

 

Let’s say you have an investor who wants to invest a significant amount of money in your business.  And you’re excited!  This money will allow you to expand your marketing, purchase necessary equipment and really take your business to the next level.  You like this investor and this investor likes you and thinks your business has serious potential.  You and this investor talk things over and you’ve agreed on the deal, worked out all of the money issues and you’re ready to move ahead.  Again, you’re really excited!  You are seeing all of the things you can do with this money to expand your business and fulfil your vision.

 

You accept the investment money and forge ahead to bigger and better things.  But you and the investor never put your agreement in writing, or if you do put it in writing, it never gets signed by both of you.  You’re busy.  Things start out great and you’re making strides.  You’re happy and the investor seems happy.

 

But something happens and now the investor is not happy.  The investor starts questioning your decisions and your progress, or the investor wants to do something that you don’t want to do, or the investor was supposed to give you more money (in traunches) but is now refusing to do so.  Your relationship deteriorates and now you and the investor can’t agree on anything.  You’re stuck.

 

At the beginning, it was easy when you and the investor agreed on everything.  But now that you don’t agree on much of anything, how are you supposed to move forward?  Do both of you need to agree to make a business decision or can you just go ahead and make it?  What if the investor takes some action on behalf of the business – like hires a new employee or buys some materials – and now the business has to pay for it?  You are frustrated and confused as to what you can do.

 

Without an agreement in writing, things can quickly become messy.  I’ve seen it so many times that I’ve lost count. If you don’t have an agreement in writing, it’s a guessing game, it’s a lot of arguing, and it’s probably going to be a lot of attorneys’ fees.  But most of the time, people don’t start out thinking that “this is going to go bad” – that’s because business people are generally optimists and are comfortable taking calculated risks.  So they move forward without putting their arrangement in writing.  After all, who wants to go talk to a lawyer?

 

But here’s the catch – it’s much easier to agree on terms at the beginning when everyone is positive and agreeable.  I love this phase because there’s so many possibilities for my customer’s business to grow.  I love the enthusiasm and the ideas and the possibilities.  Because I, too, am an optimist. But I am also practical, which means that I like to have things lined up.  So while things are going well, I can focus on moving forward and I know that contingencies are in place.  Then if things don’t go well (notice I said “if” and not “when”), I know what my options are.  The path has already been agreed upon and put in writing.

 

The importance of putting an agreement in writing cannot be understated.  Get it in writing! An agreement in writing sets out the standards and expectations for moving forward together.  It defines the roles each of you will have.  It specifies how major decisions will be made and it defines what those decisions are.  It states when the investor will infuse money into the business and it clearly states whether there are any strings attached.  It reduces the risk of disagreements and misunderstandings because you’ve discussed the issues and agreed upon how things will work.  It’s in writing and signed, so any questions can be answered by looking back to the contract.  Having it in writing protects you and the investor – but most of all, it protects your business.

 

From the investor’s perspective, a written agreement is beneficial and most of the time considered a requirement for the investment to take place.  Take this requirement seriously.  If you are given an agreement to review, read it carefully and make sure you understand every word.  Before you do anything, make a checklist of all of the deal terms you have talked about and agreed upon.  Then – this is important – make sure each of the terms on your checklist is in the written agreement.  Most of the time, problems occur because of what the agreement didn’t say.

 

Don’t worry about having to accept the agreement as it was presented to you.  Discuss it.  Negotiate it. While no deal is absolutely perfect – because we all have to compromise – it should be something you are absolutely comfortable with it.  It’s better to walk away from a deal that you aren’t completely comfortable with than to go forward and not get what you want (or worse).  If you’re not sure what to do, ask someone you trust for their advice.  If you don’t know what you don’t know, then talk to an experienced business attorney.

 

If your investor is another company (rather than an individual), be sure to determine the person who will represent the investor company.  Who is your contact person?  Does that person have the authority to make decisions on behalf of the investor – in other words, can you rely on what he or she tells you?  Even if you are dealing with an owner of the investor company, you’ll still need to be sure that he or she has full authority (without having to go to a board or other owners) to make decisions regarding your relationship.

 

One last note – when you take on an investor, there are securities laws that require certain actions.  Depending on the circumstances, and the sophistication of your investor, these actions could be simple or complex.  The consequences of not following the rules here are serious – you may even have to return the investor’s money.  This topic is too involved to cover in this series, but I’ll be covering it in a future blog post.  Just be aware that there are rules you need to follow.

 

The next posts in this series will address issues you need to consider when taking on a partner who will be involved in the business (more than just an investor), issues with having a valued employee become an owner, and suggested terms you should have in your written agreements.