Investing in Private Companies - How Does It Work?

So, have you decided to take responsibility for your financial situation and start moving things forward? Excellent!  Investing in a private company is a fantastic way to improve the financial situation and create new ways that will generate good returns in the near and distant future. This type of investment is not complicated, but it's execution involves several steps, and ensuring that it is implemented will ensure you peace and security in the present and future.

Memorandum- the entrance ticket to the investment process

The first thing to do is to create a Memorandum, called in English: Term Sheet, Memorandum of understanding or Letter of intent. This is actually a document that indicates the relationship between the parties and the potential of the transaction. The document must contain several terms: The amount, duration of completion of the transaction, and what the transaction includes. The document is not binding but it guarantees confidentiality and seeks to ensure non-negotiation with other parties within the period defined therein.

Due diligence - a tool for reducing uncertainty

Investing in a private company requires the investor to risk a large sum, which creates quite a bit of uncertainty. As the aim of investment is profits, due diligence is a very important check. Its results will allow the investor to make a decision - whether to invest in a particular company or not. The test is divided into three areas: Accounting, financial and legal. In the financial area, the price required for the investment is examined according to the market value check. In the legal area, attorneys will review company books and examine the company's shares and holdings, assets and liens, agreements, loans, guarantees for other companies, and the company's exposure to claims. In addition, the agreements and understandings with the employees are examined, with reference to collective agreements and whether they are under a union or not. The accounting field includes an examination of the accounting reports, provisions and debts, as well as an examination of the appropriateness of intellectual property.

Good faith - at your service

The law requires the company and its shareholders to act in good faith and to disclose to the investor any fact that she/he must reasonably know. Failure to disclose or act in bad faith may expose the Company to claims. Either way, in order to avoid complicated legal procedures, a professional and thorough examination is recommended.

Company Statement in an Agreement

The final step includes the formulation of an Agreement in which the representations and obligations will be specified by the parties. As part of the Agreement, the company will declare similar facts to what has been examined under the due diligence procedure, with a general statement from the company that it has presented to the investor every fact which a reasonable buyer or investor should know. In addition, the company declares that the investor must be kept informed of any changes that occur during the period between the date of signature and execution of the Agreement. This could be, for example, a legal claim or any other change that a reasonable investor should know about.

Investor Statement

The investor, on his/her part, undertakes to carry out an examination of the company and that he/she is aware of its situation. He/she must also declare that he/she is well knowledgeable in investments and understands it, and that he/she has the required amount to make the investment. As stated, the investor is in a state of uncertainty, which gives rise to a degree of risk. To protect the investor, and minimize the uncertainty, there are some settlements that will also appear in the Agreement: The investor will be protected against a dilution of his/her holding percentage, he/she can protect the management of the company by participating in the board of directors and / or obtaining veto rights and / or obtaining a signing authorization. In addition, he/she will be able to monitor the designation of the invested money and / or make a phased investment. Moreover, he/she  will be able to take priority in realizing the investment, known as Exit.

Life is fraught with thrills and risks, and risk avoidance is not necessarily a guarantee of financial security. Investing in a private company contains a level of risk, but with the right checks and accurate execution of the procedure it is certainly possible to minimize the risk and create certainty. This is an investment that may yield good fruits and change your financial situation significantly, so if you have a sum of money and you want to make it a significant amount, investing in a private company is definitely a good option.