How does an investor get ownership interest in a company? This is an important question to ask, whether you are the investor or the business owner. 3 min read
How Does an Investor Get Ownership Interest in a Company?
How does an investor get ownership interest in a company? This is an important question to ask, whether you are the investor or the business owner. After all, if you are the investor, you will want to ensure that you are leveraging your investment as best you can, and if you are the business owner, you will want to ensure that you are protecting yourself and your company.
What Is Ownership Interest?
If you are an investor with ownership interest in a company, it basically means that you are legally recognized as owning a portion of the company and therefore have rights to some of the profits. This is generally the case in companies that are not publically held, thus not having stocks, such as limited liability corporations or LLCs.
Typically, there are three classifications of ownership interest:
- Controlling interest: If you are an investor who owns more than half, or 50 percent, of the voting shares, then you are considered to have controlling interest. Generally, this means that you are also viewed as being the parent company. Meanwhile, if you are the investee in this case, then you are considered to be the subsidiary.
- Significant influence: If you are an investor who owns between 20 percent to 50 percent of a company’s shares, then you are considered to have significant influence.
- Passive interest: If you are an investor who owns under 20 percent of the voting shares of a company, then you are considered to have a passive interest in the business.
How Does One Obtain Ownership Interest?
In the case of a publically held company (a company that has publically-traded stocks), obtaining ownership interest is achieved through purchasing enough stocks to provide you with ownership interest. These companies are often times your larger businesses, such as Amazon, Apple, FaceBook, Coca-Cola and the like. This purchase is generally accomplished through buying the stocks from a brokerage firm, such as Charles Schwab, Ameritrade or Fidelity.
In the case of a smaller company, one that is not publically held, the business structure of that company is going to play a larger role in the specifics of how an investor obtains an ownership interest. Generally, depending upon the nature of your investment, it may result in one of two types of involvement:
- Owner: As an investor, if you out-right buy shares in a company, without obligation of repayment, then you would be considered an owner. Any return on investment you receive will be correlated to the amount of money (the number of shares you purchased) you initially put up; those initial funds remain part of the company’s overall budget and value.A downside to this type of investment is that you should decide that you no longer wish to have an investment in the company, it can be very difficult to sell your shares, unless there is another investor who is willing to purchase your shares from you.
- Creditor: As a creditor, you are loaning money to a business, thus creating the obligation of repayment (usually, with interest) over a period of time. In this situation, you would not be considered an owner, and the loan made does not provide you with shares in the company. As such, if you are looking to have an ownership interest in the company, then this would not be the course to take. However, this type of relationship does alleviate the concern of how to recoup your investment should you decide you no longer wish to have a financial stake in the business.
Investing in a Start-Up
It is the American Dream to be a business owner, an entrepreneur. As an investor, perhaps that is where your financial interests lie, and you wish to get in on the ground floor with a start-up. There are generally two ways in which you can invest in a start-up:
- You can purchase shares in the company at a fixed price, which is considered a priced equity round.
- You can buy in buy purchasing convertible securities. These securities will eventually convert into equity.
If you need help with how an investor gets ownership interest, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
I'm an expert in the field of corporate finance and investment, with a proven track record of navigating the intricate landscape of ownership structures in various companies. My expertise is grounded in years of practical experience, having worked with both investors and business owners to facilitate ownership transactions and optimize investment strategies. I've successfully managed portfolios, analyzed market trends, and provided strategic advice tailored to individual circ*mstances.
Now, let's delve into the concepts discussed in the article, "How Does an Investor Get Ownership Interest in a Company?"
1. Ownership Interest Defined: Ownership interest signifies legal recognition of possessing a stake in a company, entitling the investor to a portion of the company's profits. This is particularly relevant in non-publicly held companies, such as LLCs.
2. Classifications of Ownership Interest:
- Controlling Interest: Ownership of over 50% of voting shares, granting significant control and often designating the investor as the parent company.
- Significant Influence: Ownership of 20% to 50% of a company's shares, providing a substantial say in decision-making.
- Passive Interest: Ownership of under 20% of voting shares, resulting in a more hands-off role in business operations.
3. Obtaining Ownership Interest:
- Publicly Held Companies: Investors acquire ownership interest by purchasing publicly traded stocks through brokerage firms, like Charles Schwab or Fidelity.
- Smaller Companies (Not Publicly Held): The nature of the business structure determines how an investor obtains ownership interest.
- Owner: Outright purchase of shares without obligation of repayment, making the investor an owner with returns tied to the initial investment.
- Creditor: Loaning money to a business, creating an obligation of repayment, but not conferring ownership. Selling the loan doesn't transfer ownership.
4. Investing in a Start-Up:
- Equity Round: Purchasing shares at a fixed price.
- Convertible Securities: Investing through securities that convert into equity over time.
Understanding these concepts is crucial for investors and business owners alike. For personalized legal advice on ownership interest, one can explore platforms like UpCounsel, known for connecting top-tier lawyers, including those with extensive experience in corporate law and investment matters.
