One way for a business to get a large amount of cash relatively quickly is through equity investment. Depending on the specific circumstances of the situation, equity investment can offer advantages over other methods (such as selling shares to the public, or taking out a loan).
What many business leaders fail to fully understand is that when they pursue equity investment, they are selling part of the ownership of their business. Equity investors aren’t just “angels” who are giving money to a business as a gift. They expect something in return, and they have legal rights.
This type of misunderstanding has led to many lawsuits involving investments.
What rights do equity investors have?
Depending on the exact terms of the investment agreement, equity investors can have extensive rights with regard to the company’s operations. These may include the right to:
- Choose or reject executives
- Choose or reject candidates for the board of directors
- Regular updates on business operations
- A vote on business matters
Significantly, equity investors also generally have the right to sue a company and its leadership.
Business formats and equity investment
When entrepreneurs start a new business, they must decide what legal format to give the new venture. If they go into business with at least one other person and they do not specify otherwise, the business is legally considered a partnership.
Similarly, if an existing business sells ownership interests to equity investors and does not specify otherwise in an agreement, then the law considers them to have gone into partnership with the new investors. The investors have all the legal rights that a partner has.
When drafting an agreement with equity investors, business leaders can choose a format other than a partnership, or they can create a partnership agreement that spells out the rights and responsibilities of all parties. However, most equity investors are careful to protect their investments, and so they demand agreements that respect their rights.
Even the best intentions, the best business plans and the best investment agreements can go astray. Equity investors often feel unfairly shut out of business operations. Many times, they feel they have been denied the returns they were promised.
These disputes are delicate and the legal issues are complicated. Attorneys with experience in high-stakes investment litigation help investors to protect their rights and their investments.