I have been offered the opportunity to purchase up to 30% of shares in a private company. The only ROI I can feasibly expect is through dividend payments. What is the best way to protect my return, seeing as I would be a minority shareholder? And should I make part of the investment as a shareholder loan?
Generally speaking, a Preferred Share class with strong protective provisions (such as the right to appoint a board member) could afford you significant protections but if the terms are too onerous relative to the amount of money and stage of the Company, it might prevent the Company from raising further funding downstream, thus hurting your investment.
You could also put all of the money in on a convertible debenture, which has some advantages but doesn't necessarily protect you.
The best way to protect your investment is to invest in good people that you trust. It's simple and true. Happy to talk through the particulars of your situation.
The most important thing you should understand is the distribution of the equity (e.g Someone else has 70% or you are the biggest shareholder with 30%?) and the rights (power of decision) that each shareholder has.
Protection is, in my opinion, created be three things: legal rights (laws and contract), trust and information. You need to focus on mastering the three of them to leverage them in your favor and your protection.
PS: it requires more info to give a good answer
Understanding the specifics of your opportunity are necessary to provide a sufficiently detailed answer. Based on the information you have provided it sounds like the seller is looking for investment as opposed to a loan, so it may not be possible to offer a shareholder loan as a percentage.
As a shareholder in a private entity, it is important to have a very clear understanding of the rules that governs the corporation itself. Unlike publicly traded firms, most shareholders of private firms are active in their investment.
Will a 30% share grant you the option to be involved in business decisions? If not you may find you have challenges receiving any return on investment as management will have considerable latitude to determine whether there is any net income to pay out as dividends.
Does the 70% shareholder work for the company as a full time employee? How is their compensation set? Will you have any oversight in this regard?
I would strongly recommend you approach this deal by seeking a shareholder agreement that is similar to a partnership agreement where the major decisions are made through a process that involves you, while the day to day is managed by the active investor.
I would also ensure that your ROI is sufficient that your capital investment is replaced fairly quickly as it does not sound like your investment will have much, if any liquidity to it.
If there are more details of this you can share, I'd be happy to provide greater specifics.
Doing Business measures the protection of minority investors from conflicts of interest through one set of indicators and shareholders’ rights in corporate governance through another. The data come from a questionnaire administered to corporate and securities lawyers and are based on securities regulations, company laws, civil procedure codes and court rules of evidence. These scores are the sum of the extent of conflict of interest regulation index and the extent of shareholder governance index. To make the data comparable across economies, several assumptions about the business and the transaction are used. In Austria, for example, derivative suits are available for shareholders holding 10% of share capital. The prejudicial transaction cannot be voided. Adding these numbers gives Austria a score of 5 on the extent of director liability index. The index ranges from 0 to 10, with higher values indicating greater powers of shareholders to challenge the transaction. In Croatia, for example, shareholder holding 10% of Buyer’s shares can directly review documents related to suspected mismanagement by Mr. James and the CEO without filing suit in court. Adding these numbers gives Croatia a score of 6 on the ease of shareholder suits index. The extent of shareholder governance index is the sum of the extent of shareholder rights, extent of ownership and control and extent of corporate transparency indices. The protecting minority investors indicator set captures changes related to the regulation of related-party transactions as well as corporate governance every year. The change must be mandatory, meaning that failure to comply allows shareholders to sue in court or for sanctions to be levelled by a regulatory body such as the company registrar, the capital market authority or the securities and exchange commission. The changes must affect the rights and duties of issuers, company managers, directors, and shareholders in connection with related party transactions or, more generally, the aspects of corporate governance measured by the indicators. For example, in each economy, related-party transactions must be approved by the board of directors including board members who have a personal financial interest in seeing the transaction succeed.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath