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Non-Stock Subscription Agreements

Original post by Dennis Hartman of Demand Media

A business must balance its financial needs with its owners' vision and strategy in order to be successful. Striking this balance can be a challenge for small businesses that owners set up as partnerships or sole proprietorships. Giving up exclusive control may mean the ability to raise money through a non-stock subscription agreement, but it adds the need for owners to carefully select the concessions they make as leaders.

Contents

Definition

A non-stock subscription agreement is a contract between an investor and a business that governs the relationship between the two parties regarding finances and leadership of the business. For example, a partnership consisting of two business founders may allow a third individual to invest a set amount of cash in the company in exchange for a role as a limited partner. A non-stock subscription agreement for this arrangement would lay out the new partner's powers within the company, share of future profits and financial responsibility to make an initial investment to help the business grow.

Role of Stock

Stock, which represents partial shares of ownership in a public company, is one way for individuals to invest in a business. If a company is publicly traded, it may offer stock-based subscription agreements that require an investor to purchase a given number of shares in exchange for a certain type and level of involvement in the company. In the case of a non-stock subscription agreement, no stock changes hands. This means that non-stock subscription agreements are open to businesses that are not yet publicly traded, providing an alternative means of raising capital from investors.

Elements

Non-stock subscription agreements can take many forms, although most follow the same basic template. The agreement must name both the business and the investor entering into the agreement. It may also include a statement of risk, outlining the fact that an investor may never receive a profit or be able to recover the investment if the business fails. The body of a non-stock subscription agreement outlines the new investor's contribution and role in the company, including any formal title, executive responsibilities or voting privileges. Finally, a non-stock subscription agreement closes with an acceptance in which both parties sign and date the document.

Generation

A business is free to generate its own non-stock subscription agreements as long as they are in accordance with contract laws. Basic templates eliminate the need to have an attorney heavily involved unless an investor has specific demands that must be written into the agreement. The investor and business owners can negotiate the terms of the agreement to suit both parties. If another investor is available who will offer the same amount of money but ask for less control of the business, owners may have a strong bargaining position. However, if a business needs money quickly to meet its expenses and few investors are available, the investor holds an advantage and can request a more favorable non-stock subscription agreement.


                   

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About the Author

Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.


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