Investors Golden Rules
Investor Rule No.05 – Invest as a legal entity!
Being in business for so many years taught us one important lesson. The more legal shields between you as an individual and the companies you are investing or being involved with the better protected you will be. If you are thinking of becoming an active angel investor, we highly recommend to put your legal affairs in order first.
I know, as humans we would like to believe in the good in people and hope for the best, yet beware the business world is like a minefield full of personalities, complexity, hidden agendas, and many, many different points of views. Money is a funny thing, it changes people, sometimes for the better and sometimes for the worse. Making sure your legal structure is properly set up will provide a level of protection to navigate this complexity.
The reality is that as an investor as soon as you sign the subscription agreement and you are closing the deal, you, and or your entity are now a partner in the company, which comes with privileges and obligations. You now, if you know it or not, carry the liability of being a stakeholder for better and for worse. When startup founders say to me at times; “he is an investor in my startup” the correct statement is; “They are now stakeholders in my company”, a full pledge stakeholder.
As an “Investor” you now become the prime target for any legal issues, litigations, lawsuits that might arise from the activities and operation of the company. You now have a “Target” marked on your back, if you know it or not. So creating a distance or a buffer between you as an individual and your investment is paramount to the financial security of you and your family. And in most cases, if it is justified or not, you will be dragged into legal litigations, after all, attorneys and litigators will always go after the deep pocket first, beware.
In order to do it right, you want to invest vis the following to manage your investments:
- Establish a legal entity an LLC or an S corporation
- If you have a Trust that is already established you can use it for that purpose
- Or; Creating Trust before you starting to make investments
- If you already own a business or an LLC you can use it as well
No matter what you choose, do not invest as an individual or sign any legal documents personally or grant and personal guarantees for any of the deals, NO MATTER WHAT. note, you have been warned.