#smartbusinessowner ...

Before you invest in any company, Please understand clearly the nature of the investment you are making.

this is very important because...

Knowing what kind of investment you are making in a company will help you to be able to manage your expectations from the Company.

Decide whether the Money you are giving to a Company is a loan, a grant or an equity in the Startup.

It is important to be very clear about this from the beginning because each of them comes with different legal implications both for the investor and for the Company.

If you invest money with the Company as a loan, what it means is that the Company is indebted to you.

The Company has an obligation to pay back the money.

This would still be the case, regardless of whatever name you choose to call the Agreement, whether loan Agreement or Investment Agreement so long as the element of payback is in the arrangement, then it is a debt.

A relatable example would be companies that promise monthly, quarterly, bi-annual or annual pay-back of capital with a fixed interest.

These kinds of investments are usually short-term and carry a fixed Return on Investments (ROI).

If you invest or fund the Company in exchange for Equity in the Company, It means you are getting an ownership stake in the Company.

Being an Equity investor means that you are a Co-owner of the business and that makes you a shareholder in the company.

Being an Equity Investor in a Startup is more of a long-term than a short-term thing.

It means you are ready to be invested in the Company for the long run, whether or not dividends are declared and paid especially if the Company is still a growing Startup.

Being an Equity investor means that you are not using your "Urgent 2K" or money that you cannot afford to lose e.g. house rent, school fees e.t.c to invest in a company for equity.

Again, It is important to be very clear on what kind of investor you want to be because that determines your rights and obligations as an investor.

It also determines the type of legal documentation or contract that would be prepared for you and what terms to include in the contract.

If you invested for short-term ROI, that doesn't make you an equity investor, you don't get an ownership stake, you just get your capital and your interest.

You can also decide to loan the company your money for a long time over a fixed rate.

The bottom line is you are getting your money back.

If you give a grant to a Company, it's dash money...

there is usually no condition attached to it.

You don't get paid back the money if the Startup fails and you don't get any equity or ownership stake in the Company.

So...

if you are thinking of investing in a Company for quick returns on your investment, maybe you should avoid equity investment.

A growing Startup may not even pay dividends for as much as three (3) years and it is perfectly normal if they are reinvesting the money into the Company to grow its value.

Your only cash-out option would be to offload your shares.

And if this is done at a higher valuation, you obviously make money.

I hope my explanation was simple enough for you to understand my point?

Lol!

To your #LegalSense

-BarinaadaLegal

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