How Do I Invest in a Private Company?

How Do I Invest in a Private Company?
How Do I Invest in a Private Company? (Image: FredoAlvarez, Flickr)

Investing in a private company requires permission from the board of directors or whomever owns the company. There is a great deal less transparency involved for private investors relative to public ones. In most cases, substantial investors are given a place on the board of directors as a part of their investment. The minimum amounts for investing in private companies are generally quite high and require complex contract negotiation.

Contact the board of directors or ownership of the firm looking for investment. Legitimate private companies never solicit private investment from the general public. If anything, they will go through venture capital firms or contact consultants to raise money for them. Small investors would be better advised to put their money in companies that issue stock on public exchanges.

Work through a private investment firm. The most common forms of private equity firms include venture capital companies, which invest in new, unproven businesses, and mezzanine financing companies, which deal with smaller but mature companies.

Consider forming an investment club with like-minded investors. This can be formed as a limited liability company, partnership or other corporation type. In most cases, such clubs will need to file with the Securities and Exchange Commission to comply with all relevant laws. View the reference below for more details.

Protect the investment. Private investors, in part because of the amount of money they are expected to put in, are often expected to take on a direct advisory role to the company that they have invested in. In this way, private investing is quite different relative to public investing. Management experience is invaluable for the private investor.

Beware of companies seeking private investment that do not offer considerable transparency in their financial matters. If, as an investor, you are left wondering whether or not a company is profitable because of a lack of clear data, the latter is probably true.

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