Legal Question in Investment Law in California

Investing in a start up

Gentlemen,

I have an opportunity to invest in a start up bio-medical company that will incorporate from a LLC. The parent company is supporting the start up at a rate of $30K a month. The parent company has been successful in the past with another company similar to this one and sold the product and company to a larger company for a substantial gain of 3X. The start up company wants to do a private placement for $10 million and sell only common stock. Part of the proceeds of the private placement is to pay back the money the parent company is providing.

Would it be more benificial to hold preferred stock rather than common stock? Also what other pitfalls would I face by investing in this company.

Any information you provide will be greatly appriciated.

Thank You

Rex


Asked on 5/30/02, 3:10 pm

1 Answer from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Investing in a start up

Your question reads like, "I met a 24-year-old brunette, and her 30-year-old sister is happily married. What are the pitfalls in marrying her? And would I be better off with the redhead?

In other words, you provide almost no information. It is impossible to advise you without knowing much more about the investment opportunity; that's why prospectuses are required. You should obtain and study all the available material, concentrating on the sections of the prospectus (or private placement memorandum or like document) that discuss risk and dilution.

If no preferred stock is to be offered, it isn't a consideration. Usually preferred stock is less risky but offers less potential reward, but preferred stock terms vary all over the place and each issue needs to evaluated individually.

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Answered on 5/30/02, 4:41 pm


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