A business owner needs to raise money. He comes up with an idea to "sell" a portion of his equtiy in the business. A prospective investor listens to the business owner’s pitch and likes the idea. He decides to invest nearly $20,000 in the business in exchange for ownership. The problem? Nothing is in writing, yet the investor has given the money, and there is nothing that documents whether the "investor" is entitled to ownership, whether it was a loan or perhaps even a gift.
I can’t tell you how many times I’ve seen something like that happen. It must happen to others as well because business advisor Mike Colwell recently wrote on a similar topic. It seems incredulous to me that someone could part with that kind of money without assurances in writing but I have seen it happen between friends and complete strangers alike. Why does this occur?
I think it boils down to trust. Most people are just too trusting. They believe things will work out and many don’t want to confront or offend the other person. Or, they’re just plain stupid (but I prefer the trust angle). So by all means trust your partner but make sure to get it in writing BEFORE you invest the money.