Understanding Venture Capital Investments

Through venture capital investments, investors and companies come together to meet their mutual need for profits. Venture capital investments handled by the law firm of John McDuff, Attorney at Law, may be as small as $100,000 or they may be worth as much as tens of millions of dollars. Contact my law firm to discuss how best to negotiate, finance and formalize venture capital investments.

A company can raise capital through the ordinary sale of stock or other types of ownership units, where all units have the same rights. Under these circumstances, the unit holders have no control within themselves to intervene in the company’s business. And it is difficult at the start-up phase of a company to raise capital in this manner, for the investor has no control and assumes a large degree of risk. There is a promise of large profits, but the risk of loss is high.

Venture capitalists specialize in making large investments in these types of circumstances, which allows the company to meet its business goals. To do this, however, venture capitalists exact a price from the company.

Return on Investment

First, a venture capitalist will require a larger proportion of the profits than ordinary investors might receive. For example, the venture investor might invest 25 percent of the capital but get a 40 percent share of the ownership.

Then again, a venture capitalist may invest 90 percent of the capital and receive 40 percent of the stock. However, they exact a higher return by lending some of the money, or buying preferred stock, which is paid first, before the ownership holders get paid anything. There may be an agreement that these loans are convertible into stock. These would be exercised under negotiated circumstances. The use of options also can be employed.

Dollars and Control: Assuring Optimal Business Operations

To have some say in the operation of the company, the investment agreement may provide that the venture investor will have some seats on the board of directors.

If the business is failing, the agreement may allow for the venture investor to take over the management of the company.

Contact Austin Business Attorney, John McDuff

Whether you are a potential venture capital investor or a start-up company seeking to attract capital, contact me or call 512.457.1177 to schedule an appointment.

I am John McDuff, an experienced attorney and CPA. I welcome the opportunity to provide knowledgeable counsel and representation that is fully reflective of my years of experience in the practice of business and corporate law.

 

The information that you obtain at this site is not, nor is it intended to be, legal advice, and any use of this information will not create an attorney-client relationship. We invite you to contact us to get advice.