To invest in someone else’s business, you buy either an ownership stake or a debt position in a private company, using paperwork that has to fit a federal securities exemption. Most private deals in the United States close under Regulation D or Regulation Crowdfunding, which means the Securities Act of 1933 controls who can put money in, how the offer can be made, and how long you have to hold what you buy.1eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D The steps below walk through what you are buying, whether you qualify, what to check before signing, and what happens after the money leaves your account.
Pick the Structure You Are Actually Buying
The first decision is what kind of instrument you are getting for your money. Four show up in almost every private deal.
Equity
Buying equity means purchasing shares in a corporation or membership units in an LLC. You share in the profits when the business does well, and you absorb the losses when it doesn’t. If the company grows and eventually sells or goes public, your stake can be worth many times what you paid. In a liquidation, equity investors get paid last. Creditors, employees, and secured lenders all stand ahead of you in line.
Debt
A debt investment works like a loan. You lend the company a set amount and receive interest payments on a fixed schedule, with the principal due by a maturity date. Rates between 5% and 15% are common on private business loans, depending on the company’s creditworthiness. The upside is predictability and priority in a failure. The downside is a hard ceiling on your return: no matter how well the company does, you get your principal and interest back, nothing more.
Convertible Notes
A convertible note starts as debt and converts into equity when a triggering event happens, usually the next priced funding round. It carries an interest rate and a maturity date like any loan, plus a valuation cap, a conversion discount, or both. If the company raises its next round at a much higher valuation, the cap lets you convert at the lower capped price and end up with more shares. Convertible notes are common in early-stage deals because they postpone the hardest question, which is what the company is actually worth.
Simple Agreements for Future Equity
A SAFE looks similar but is not debt. It has no interest rate and no maturity date. You give the company money now in exchange for the right to receive equity later, typically when a priced round closes. SAFEs usually include a valuation cap or a discount. Because there is no maturity date, the company faces no deadline to convert or repay. That is simpler for the company and riskier for you, since nothing forces a resolution if the next round never happens.
Confirm You Are Allowed to Invest
Federal law does not let just anyone write a check into a private company. Whether you qualify depends on the exemption the company is relying on.
Accredited Investor Status Under Regulation D
Most private placements run under Regulation D, and the gatekeeping concept is the accredited investor. Under Rule 501, you qualify if you earned more than $200,000 individually, or $300,000 jointly with a spouse or spousal equivalent, in each of the two most recent years and reasonably expect the same this year. You also qualify if your net worth exceeds $1 million, excluding the value of your primary residence.1eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D Holders of certain professional certifications, including the Series 7, Series 65, or Series 82, qualify regardless of income or net worth.
Which subsection of Rule 506 the company uses affects you as well. Under Rule 506(b), the company cannot publicly advertise but can accept up to 35 non-accredited investors alongside an unlimited number of accredited ones. Under Rule 506(c), the company can advertise freely, but every investor has to be verified as accredited, which usually means providing tax returns, bank statements, or a written confirmation from a licensed attorney, CPA, or broker-dealer.2U.S. Securities and Exchange Commission. What Is Form D
Regulation Crowdfunding If You Are Not Accredited
If you don’t meet the accredited thresholds, Regulation Crowdfunding is a narrower door that is still open. Companies can raise up to $5 million in a 12-month period through SEC-registered crowdfunding platforms, and virtually anyone can participate.3U.S. Securities and Exchange Commission. Regulation Crowdfunding Your personal limit depends on your finances. If either your annual income or net worth is below $124,000, you can invest the greater of $2,500 or 5% of the higher figure. If both are at or above $124,000, you can invest up to 10% of the greater figure, capped at $124,000 total across all crowdfunding offerings in a rolling 12 months.4eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General Rules and Regulations
Do Your Own Due Diligence
Private companies aren’t subject to the disclosure rules that public ones face. That shifts the homework onto you, and skipping it is where most private investment losses actually begin.
Financial Records
Ask for profit-and-loss statements and balance sheets covering at least the last three fiscal years. These show revenue trends, debt levels, and whether the company is genuinely profitable or burning cash. Tax returns provide an independent check on the numbers, because the figures reported to the IRS carry legal consequences for the owner. Inconsistencies between internal statements and tax filings can point to aggressive accounting or undisclosed liabilities.
Legal and Organizational Documents
The articles of incorporation or the operating agreement spell out how the business is governed, what classes of ownership exist, and what rights attach to each class. Some companies issue preferred shares with liquidation preferences that can wipe out common equity in a sale. If you are being offered common shares while insiders hold preferred, understand the waterfall before signing. Check for outstanding litigation, liens, or regulatory actions too. Private companies aren’t required to disclose these unless you ask.
Management Background
The people running the business matter as much as the numbers. A basic background check on founders and key executives can surface prior bankruptcies, regulatory sanctions, fraud convictions, or a pattern of failed ventures. Look for gaps between claimed credentials and actual records. A founder who inflates a resume tends to inflate other things as well.
Business Plan and Market Position
The business plan and competitive analysis let you test whether growth projections are realistic. Compare revenue targets against industry benchmarks. Ask what assumptions drive the model and what happens if those assumptions turn out to be wrong. The plan should also spell out an exit strategy, which is directly tied to when you might get your money back.
Understand the Paperwork You Will Sign
Private investments generate a stack of documents. Each one does a different job.
Subscription Agreement
The subscription agreement is the core contract for an equity investment. It records your commitment to purchase a specific number of shares or units at a stated price, includes your legal name, address, and investment amount, and contains your representations that you meet the applicable investor qualifications and understand the risks.5U.S. Securities and Exchange Commission. Form of Private Placement Subscription Agreement By signing, you affirm that no one pressured you and that you received the information you needed to decide.
Shareholders Agreement or Operating Agreement
This document governs the ongoing relationship among owners and management. It covers voting rights, distribution policies, and restrictions on transferring your shares. Read the drag-along rights, which let majority owners force you into a sale even if you would rather hold. Pre-emptive rights run the other way, giving you the option to invest in future rounds to keep your ownership percentage from being diluted.
Promissory Note for Debt Investments
If you are lending rather than buying equity, a promissory note replaces the subscription agreement. It states the principal amount, the interest rate, the payment schedule, the maturity date, and what counts as a default. For a secured loan, you may also want a UCC-1 financing statement filed with the state to establish your priority claim on specific business assets. UCC-1 filing fees vary by state but generally fall between $10 and $100.
Capital Call Provisions
Some agreements, particularly in fund structures or multi-phase ventures, include capital call provisions requiring you to contribute more money when the manager requests it. Missing a call can trigger penalty interest, a forced sale of your existing stake at a steep discount, or liability for losses caused by your default. Before signing anything with a capital call, confirm you can honor future calls, not just the initial check.
Close the Deal
Once terms are agreed and documents are prepared, closing is relatively simple. Signing usually happens through a digital signature platform, though some loan instruments require notarization. Funding is almost always a domestic wire transfer, generally costing $15 to $30 at major banks. Some deals route funds through a third-party escrow account that holds the money until closing conditions are satisfied, which gives both sides some protection.
After the company receives your money, you should get a countersigned copy of every agreement. For equity, the company issues stock certificates or updates its capitalization table to reflect your ownership. For debt, you receive an executed promissory note. Keep these documents somewhere secure. You will need them for tax reporting, future funding rounds, and the eventual exit.
The company also has to file Form D with the SEC within 15 days of the first sale of securities in a Regulation D offering. The date of first sale is the date the first investor becomes irrevocably committed. You can confirm the filing on the SEC’s EDGAR database, and it is worth doing. A missing Form D is a yellow flag about the company’s compliance habits.6U.S. Securities and Exchange Commission. Filing a Form D Notice
Plan for a Long Wait to Get Your Money Back
Getting money into a private company is the easy part. Getting it out can take years, and sometimes doesn’t happen.
Rule 144 Holding Periods
Securities from a private placement are “restricted securities” and cannot be freely resold. Rule 144 sets the minimum holding periods. If the company files reports with the SEC, you have to hold for at least six months. If it doesn’t file reports, which is the case for most small private companies, the minimum holding period is one full year from the date you paid in full for the securities.7eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters Even after the clock runs out, finding a buyer for shares in a company with no public market is a separate problem.
Right of First Refusal
Many shareholder agreements include a right of first refusal that limits who you can sell to. Under a typical ROFR clause, before selling to an outside buyer you have to offer your shares to the company and sometimes to the other existing investors at the same price and terms. Only if they decline can you proceed with the outside sale, and even then you usually have a tight window to close.8U.S. Securities and Exchange Commission. Right of First Refusal and Co-Sale Agreement Miss that window and the ROFR resets, starting the process over.
Realistic Exits
Most private investors get their money back through one of three events: the company is acquired, the company goes public, or the company buys back your shares directly. All three require the company to succeed, and none of them run on your timeline. For debt, the exit is simpler in theory since the note has a maturity date, but a struggling company may default or push for an extension. The honest planning assumption is five to ten years, or never.
Know the Tax Consequences
Tax treatment depends on the business structure, how long you hold, and whether you eventually sell at a gain or a loss.
Pass-Through Reporting on Schedule K-1
If the business is a partnership or a multi-member LLC, which most private companies are, you will receive a Schedule K-1 each year reporting your share of income, deductions, and credits. You owe tax on your share of the income even if the company didn’t distribute cash to you, which catches some investors off guard. Losses flow through as well, but deductibility is limited by your basis in the investment, at-risk rules, and passive activity limitations.9Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Capital Gains When You Sell
If you sell an equity stake at a profit after holding it more than one year, the gain is taxed at long-term capital gains rates. For 2026, those rates are 0%, 15%, or 20% depending on your taxable income, and most private investors land in the 15% or 20% bracket. A high-income investor also owes the 3.8% net investment income tax on top. Short-term gains on stakes held one year or less are taxed as ordinary income.
Section 1244 Ordinary Loss
If the business fails, the normal treatment is a capital loss, which can only offset capital gains plus $3,000 of ordinary income per year. If the company qualifies as a small business under Section 1244 and was organized as a C corporation with $1 million or less in total capital contributions, you can deduct up to $50,000 of the loss, or $100,000 on a joint return, as an ordinary loss.10Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock Ordinary losses offset regular income dollar for dollar, which is a meaningful benefit.
Qualified Small Business Stock Exclusion
On the upside, Section 1202 lets investors in qualifying C corporations exclude a substantial portion of their gain from federal income tax. For stock acquired in 2026, recent legislation provides a graduated exclusion: 50% of gain excluded after three years, 75% after four, and 100% after five. The maximum excludable amount is $15 million or ten times your basis in the stock, whichever is greater.11Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock The company has to be a domestic C corporation with gross assets under $50 million at issuance and has to be in an active trade. Finance, hospitality, and professional services generally don’t qualify.
Budget for the Costs Around the Investment
The check to the company isn’t your only expense. Having a business attorney review the offering documents and the subscription agreement typically costs between a few hundred and several thousand dollars, depending on the complexity of the deal and your market. It isn’t legally required, but skipping it to save money on a six-figure investment is a false economy. Wire transfer fees, notarization for loan instruments, and any escrow fees add smaller amounts. If you invest through your own LLC or trust, you also have formation and maintenance costs for that structure.