I'm have a S-corp start-up company and I am the only share holder. I've incorporated through Legal zoom and have 100 shares. I have 3 friends who would like to invest and I plan on selling them shares. What steps do I need to take and how to write an agreement. Do I need to hire a lawyer? I would like to start this asap to get the wheels moving on my projects.
2 Answers from Attorneys
Once you start selling shares, particularly to people who might not be active owners/employees of the business, being incorporated becomes substantially more complicated. You will need an attorney to assist you with these next steps.
Before I became a lawyer, I did several start-ups with friends and business associates, with varying degrees of business success and freedom from down-stream disputes among the investor-promoters. I did have an MBA and had done tons of reading on how to organize and run a new business. The investment amounts involved ranged froma a few thousand up to $150K or so, in 1980s dollars.
My advice is that first of all, it depends upon the dollar sums involved. It's much harder to justify hiring a lawyer when the investments are under $10K than when they are over $100K. Next, it depends upon the sophistication of the parties involved. Co-promoters who have lots of small business experience MAYBE don't need professional advice and well-prepared documents as much as do those who never were entrepreneurs. On the other hand, some seasoned entrepreneurs may tend to be more critical and litigious than ordinary folks. A third consideration is whether the investors will be involved in the business and thus able to share decision-making and get full information, or will be non-participating.
I would recommend at least having an initial consultation with one or more small-business lawyers. In addition, read two or more self-help law books (Nolo Press is one publisher) on how to start and run a small business in California. Focus on the finance-related chapters.
Documents to consider preparing include an Investor Disclosure and a Co-Promoter Agreement. The first is aimed at disclosing the risks involved in an investment in your business, and is similar to a prospectus. The latter is a contract between your investors and you, if they are to be involved in the business beyond being passive investors, and defines roles, responsibilities, titles, pay scales, and much more.
If in any doubt, ALWAYS use an attorney for "securities" matters, including peddling stock is a startup business. Missteps can lead to civil and criminal penalties.
Please feel free to contact me for further suggestions or to answer questions.
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