How Does an Investor Get Ownership Interes in a Company: Everything You Need to Know
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
2. What Is Ownership Interest?
3. How Does One Obtain Ownership Interest?
4. Investing in a Start-Up
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.