Many businesses are formed through an idea shared between friends or associates who agree on a common ground for innovation. However, after launching your concept and dedicating a percentage to investors, problems may arise.
Missed projections may necessitate altering your strategy. Yet, many entrepreneurs lack an understanding of the rights investors have once they commit to helping a business succeed.
While the original ideation of the business was yours, you must remember you relinquished control of a certain percentage of ownership by accepting financial support. As such, you must remain mindful of investors’ rights.
An equity investor has rights to your business
Investors may ask for a significant share of your company since dedicating their resources accompanies considerable risk. And since they have a vested interest in your business, they typically want to guide decisions in the way their previous experiences dictate.
Depending on your agreement, an investor may choose to exercise their rights by voting on matters such as:
- Major business decisions
- An elected board of directors
- Removing you from the company
And, if they feel as though they are unable to exercise their rights, an investor could sue your company.
Why would a part-owner sue the company?
Economic loss may lead to a lawsuit against you, especially if you made decisions without an investor’s knowledge or consent. Examples of such activities might include corporate malfeasance, securities fraud or data mining.
Certain business names stand out primarily because of action taken against them. Volkswagen and Enron investor disputes involved billions of dollars. And although a court recently dismissed a class action suit regarding an alleged Facebook data privacy breach, you should consider what reputation you want attached to your business name.
Investors bring a wealth of first-hand experience to the business, from which you can benefit
Not every potential suit filed against you will have a direct financial impact on your business. However, failing to recognize the rights of your investors could shed a negative light on your transparency and integrity.
Ultimately, you give up a percentage of your ownership to investors you trust to help bring your dream to fruition. Respecting their rights throughout the process may be the best way for all of you to accomplish your goals.