I'm pretty new to investing.

Some ways I've heard it's possible to invest in a small business are:

  • owning shares in a company
  • owning stock in a company
  • holding a percentage in a company (does this make you a stakeholder or shareholder)
  • owning convertible debt (converts to shares at a certain point?)
  • owning options
  • issuing debt note

In the context of investing in a small business that intends to remains a small business (ex: pizza place):

  1. what does each option mean
  2. what legal rights and responsibilities does each option give
  3. what types of return or compensation does each option give

How would this be different if investing in a small business that intends to become a medium business (ex: small factory, clothing label) or a startup that intends to IPO (ex: the next Facebook)

1 Answer 1


The first 3 are the same as owning stock in a company would be measured in shares and would constitute some percentage of the overall shares outstanding. If there are 100 shares in the company in total, then owning 80 shares is owning 80% is the same as owning 80% of the common stock. This would be the typical ownership case though there can also be "Restricted stock" as something to note here.

Convertible debt would likely carry interest charges as well as the choice at the end of becoming stock in the company. In this case, until the conversion is done, the stock isn't issued and thus isn't counted. Taking the above example, one could have a note that could be worth 10 shares but until the conversion is done, the debt is still debt. Some convertible debt could carry options or warrants for the underlying stock as there was the Berkshire convertible notes years ago that carried a negative interest rate that was studied in "The Negative Coupon Bond" if you want an example here.

Options would have the right but not the obligation to buy the stock where there are "Incentive Stock Options" to research this in more depth. In this case, one could choose to not exercise the option and thus no stock changes hands. This is where some companies will experience dilution of ownership as employees and management may be given options that put more shares out to the public.

Issuing debt wouldn't change the ownership and isn't direct ownership unless the company goes through a restructuring where the creditors become the new stock holders in the case of a Chapter 11 situation in the US. Note that this isn't really investing in a small business as much as it is making a loan to the company that will be paid back in cash. If the company runs into problems then the creditor could try to pursue the assets of the company to be repaid.

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