A business owner approaches you to invest in his business. He comes up with an idea to “sell” a portion of his equity in the business. You listen to the business owner’s pitch and likes the idea. You decides to invest in exchange for “ownership.” The problem? Nothing is in writing, you have invested the money, and there is nothing that documents whether you are entitled to ownership, whether it was a loan, or perhaps even a gift.
I cannot tell you how many times I’ve seen something like that happen. I have seen people invest hundreds of thousands of dollars without a written agreement signed by the parties. It seems incredulous to me that someone could part with that 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 do not want to confront or offend the other person. Maybe, they want to be the kind of person that does business by a handshake. Or, they’re just plain stupid (but I prefer the trust angle). So by all means have a healthy respect for your business partner, but make sure to get it in writing BEFORE you invest money in a business.