My husband and I are interested in making a cash investment in a start up computer game company. In return for our investment, we would receive a 25- 33% interest in the company. What is the best legal document, or corporate structure to use to protect our investment and protect us from any liability?
1 Answer from Attorneys
There a few pieces to look at for protecting both your investment and subsequent ownership of the company, and yourselves personally, and is a little more complex than can be fully delved into here.
The simpler question is how to best protect you folks personally, and the answer to that is to create a business entity to invest the funds and become a member or shareholder (depending on if the startup is an LLC or corporation, respectively) of the startup. You will want to speak with your accountant as to if there are any specific considerations unique to your situation that, from a tax perspective, would dictate towards one entity type or another.
As to what documents will be needed for the purchase of the membership interest, the documents needed will depend on how you see the investment being returned (whether you expect your ownership to be bought out after a period of time) or if you plan to stay as an owner of the company long-term. The terms for how your investment will be repaid/how your ownership will work are best fleshed out in a purchase agreement for the 25-33% ownership stake, and subsequently also in the startup company's governing document (either 'Bylaws' or 'Operating Agreement', depending on the start-ups structure) which would likely need to be amended and restated to account for the buyout terms of your ownership or to ensure the corporate governance otherwise fits your desired investment approach.
You may, depending on your goals as to the manner of the investment return and timeline for same, also want to consider a lending position rather than an equity position, however if your desire is to buy in an be part of the startup's growth, the equity position may well be the desired path. A loan, without an ownership interest, also further avoids the chance of any liability for the startup if you are not an owner, but a lender only.
I would encourage you to speak more in depth with counsel as to the finer points of how you wish for your investment to work for you, and would invite you to call out office and speak with myself or Attorney Jake Bowie as to further considerations, options and assistance.
Best of luck, and we at Ainsworth, Thelin & Raftice wish you well and stand by ready to assist.
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