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Written by: Richard B. Jefferson, Esq. Lately, many of my company and investor clients have asked me about the different ways that an investment can be made. The true answer to this question is that an investment deal can be whatever the parties agree to.

Since broad answers usually leave my clients with that unsatisfied look on their face that says “I’m paying you legal fees for what now?” I like to follow those types of responses with a couple of realistic examples, such as:

There are two basic structures to taking on investors:

1) Rate Of Return Investor (no company ownership). An investor invests $100,000 in your company. You and the investor agree that the investor will receive 30% of all net income received by you with regards to the income generated by your company until the investor has received 2.5 times his investment, or $250,000. Once the investor has received $250,000 then you do not owe the investor any more money.

2) Equity Investor (ownership). You and the investor agree that in exchange for the investment he or she will have an equity stake in the company. For example, an investor invests $100,000 in your company and receives 30% of equity (shares if a corporation; units if a limited liability company) in the business. Investor will then be entitled to 30% of the business’s net profit for as long as the parties agree to.

There are a number of issues to consider when taking on investors (investor payback, investment ceilings, definition of net income, management participation in company, etc.), but those can be determined once one of the above basic structures is chosen.