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Minerswife
12-02-2013, 08:55 AM
I really need some input. We are a startup with an equity investor. If another investor approaches us to invest, do we have to clear that with original equity investor? Will it cut the original investors profit or will we pay original investor first and second investor last?

Hope this makes sense.

Freelancier
12-02-2013, 09:38 AM
What legal agreements do you have in place with the first investor regarding potentially diluting the pool of shares? Or is the investment a flat amount for a flat yearly return until the investment money is returned? Or did you not draw up any agreements concerning the stock... can they sell their shares to another private investor without your permission?

Business Attorney
12-02-2013, 02:56 PM
It really depends on how you structured the original deal and what agreements you may have that might supplement or alter the results of your structure. Then there is always the issue of fiduciary rights and fair dealing.

Generally, unless the first investor in has some preferred rights, preemptive rights, anti-dilution protection or rights to approve subsequent investors, then the investor has no right to approve or disapprove a subsequent investor unless he has sufficient voting power to block the issuance of the equity under state law, your charter or bylaws if the entity is a corporation. If the entity is an LLC, some state LLC acts require unanimous approval of the existing members before a new member can be admitted, unless the operating agreement of the LLC specifies otherwise.

In short, there are far too many variables to have this question answered in a forum. To avoid significant problems, you really need to get your business attorney involved in this decision. Taking in equity is a serious step and involves corporate governance rights, securities law issues and more. It should not be treated lightly.

Freelancier
12-02-2013, 05:47 PM
In short, there are far too many variables to have this question answered in a forum.

I'm thinking that they didn't go -- but should have gone -- to an attorney when they took on the first investor. It sounds like they did not, so there's probably a lot of issues they didn't handle that they should have.

Twhansbury
12-04-2013, 08:48 AM
David and Freelancier are spot on, This is a great thread.

In addition the original investor might have rights to invest further either along with new investor or at set agreement.
Very important to address these things upfront rather then at a point like this.