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we want to invest 75k in a business start-up they have drawned up paperwork that states we will recieve 10 percent of company as shareholders and recieve monthly intrest only payments for our investment plus be paid back within one year for intial investment is this legal
State/Country relating to Question: California Already Tried: online
Good evening. Yes, it is legal. The question you need to ask, however, is what happens if the company does not generate sufficient revenue to pay you back your investment in 1 year? Do you get a bigger ownership interest? Do you have a security interest in any of the business' assets so that you are ahead of unsecured creditors? The other critical question you need to look at is what kind of compensation and other fees are the 90% owners getting?
I hope this has given you the guidance you were seeking. I wish you the best of luck!
The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.
thank you for your response, follow up question is if there are 21 investors and 5 of them are being paid interest only payments and considered shareholders as well, is that legal in california? or is this considered a ponzi scheme? thanks
This isn't a ponzi scheme unless the money from some investors are set up to pay other investors. It is perfectly legal to have different classes of shareholders, but the key is why are the 5 investors getting different treatment than the other 16? Are they contributing more? Or, were they there first? If everyone is investing the same and there are no differences, I would not agree to be one of the 16 investors. As long as all this properly disclosed, however, it is an investment decision by the investors, and not illegal.
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