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Should you consider taking business funds from angel investors?

On Behalf of | Apr 28, 2023 | Business Formation |

Many entrepreneurs have innovative business ideas with the potential to generate great profits but don’t have enough money to launch a company. Taking on investors seems like a logical means of raising startup capital.

For example, high-net-worth individuals, sometimes referred to as angel investors, may be interested in investing their private funds directly into emerging businesses. This type of funding can help you launch your company, but as with all business issues, consider taking on angel investors carefully.

Are there risks for entrepreneurs?

Each time you form a binding agreement involving your business, there are usually some legal implications. For instance, accepting funds from an angel investor may mean registering your company with the Securities Exchange Commission (SEC). If so, you will be subject to the rules and regulations mandated by the SEC.

Another possible hazard is losing at least some control over your business operations. Angel investors are not immune from making mistakes that could increase your legal liability when given a large share of company ownership. Unfortunately, such errors could send your startup down the wrong path, resulting in business litigation and other problems.

How can you minimize your risks?

Sure, you need to raise money before completing your business formation strategy, but it is unwise to accept funds without looking into investors. Ideally, the individual should be accredited and have experience investing in startups and small businesses.

If an angel investor has expressed interest in your ideas, do not be afraid to enter negotiations. Have a legal representative examine the contract to make sure the deal does not compromise your rights or increase your liability.

A professional evaluation also ensures your investment activities do not violate Texas business laws.

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