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It's par for the course these days for entrepreneurs to seek outside funding for a small business or start-up. Some draw the attention of venture capitalists, while others head to crowdfunding websites like Kickstarter.
Though these investors are technically contributing to your business, they're not doing so without expecting something in return. As much as entrepreneurs would like to take the money and run, the reality is that investors have rights.
And if you fail to respect those rights, you could find yourself in the middle of a lawsuit.
Litigation is actually not all that uncommon when it comes to investors. These people have given you money and they want to ensure that you are using it properly. As such, you need to be aware of your investors' rights.
These rights ultimately depend on your investor agreement; whether you have incorporated or registered with the state; and what state laws say. Corporate investors, for example, have slightly different rights than minority investors in a general partnership.
However, in most situations, an investor's rights include:
- The ability to inspect the business' books and records;
- The right to a full and accurate accounting of the books;
- The power to sue in the event of possible misconduct;
- The option to cash out upon specified events; and
- A claim to dividends.
Large-scale investors often have the right to vote on and be informed of major business decisions.
If you're not sure what obligations you have to your investors, it would be wise to talk to a local business attorney before any issues come up. Know your investors' rights before you wrongly tell them "no."