If you have an entrepreneurial child attempting to launch a start-up, at some point or another, you may have asked yourself how you can support your child’s entrepreneurial dream while still protecting your life savings. In most cases, what the entrepreneur needs is an initial equity investment to take their idea from an initial concept to a business reality. At these early stages, banks and other lending institutions are often reluctant to grant entrepreneurs with substantial funding without security, thus creating another hurdle for growth. Therefore, entrepreneurs must either save up the money themselves or look to a private lender who will grant them the money at a higher interest rate.
One way that you may be able to help in such instances, is to either guarantee the loan from the bank, which comes with its own legal concerns, or provide private equity funding on your own. If you choose the latter, you need to make sure you are still protecting your interests and that the liability for any investment you make into the business is limited. One way to do this is to become a shareholder of the company through which the business is run, and to set-up a Shareholders’ Agreement that addresses some of your concerns. While your child and his or her business partner, if he or she has one, will likely seek to have control over the company, as an initial investor you could arrange to draft a Shareholder Agreement that gives you certain veto provisions until the business comes to fruition or reaches certain agreed upon targets. That way, although in reality you may only hold 10% or less of the company’s shares, in the early stages you will have the ability to veto certain key decisions that you feel may unravel the business. This will give you the peace of mind to make a fairly large initial investment to support your child, while agreeing to a limited role of the overall growth of the company.
When entering into business relationships with friends or family members it is often the uncomfortable questions that are left out which cause the most grief down the road. If you can find a solution that works for everyone up front, you will not only help friends and family members achieve their goals but you will also protect your own interests. If you’d like to learn more and discuss ways in which you can support your child while still protecting your interests, please give our office a call.