I have been offered the opportunity to purchase up to 30% of shares in a private company. The only ROI I can feasibly expect is through dividend payments. What is the best way to protect my return, seeing as I would be a minority shareholder? And should I make part of the investment as a shareholder loan?
Generally speaking, a Preferred Share class with strong protective provisions (such as the right to appoint a board member) could afford you significant protections but if the terms are too onerous relative to the amount of money and stage of the Company, it might prevent the Company from raising further funding downstream, thus hurting your investment.
You could also put all of the money in on a convertible debenture, which has some advantages but doesn't necessarily protect you.
The best way to protect your investment is to invest in good people that you trust. It's simple and true. Happy to talk through the particulars of your situation.
The most important thing you should understand is the distribution of the equity (e.g Someone else has 70% or you are the biggest shareholder with 30%?) and the rights (power of decision) that each shareholder has.
Protection is, in my opinion, created be three things: legal rights (laws and contract), trust and information. You need to focus on mastering the three of them to leverage them in your favor and your protection.
PS: it requires more info to give a good answer
Understanding the specifics of your opportunity are necessary to provide a sufficiently detailed answer. Based on the information you have provided it sounds like the seller is looking for investment as opposed to a loan, so it may not be possible to offer a shareholder loan as a percentage.
As a shareholder in a private entity, it is important to have a very clear understanding of the rules that governs the corporation itself. Unlike publicly traded firms, most shareholders of private firms are active in their investment.
Will a 30% share grant you the option to be involved in business decisions? If not you may find you have challenges receiving any return on investment as management will have considerable latitude to determine whether there is any net income to pay out as dividends.
Does the 70% shareholder work for the company as a full time employee? How is their compensation set? Will you have any oversight in this regard?
I would strongly recommend you approach this deal by seeking a shareholder agreement that is similar to a partnership agreement where the major decisions are made through a process that involves you, while the day to day is managed by the active investor.
I would also ensure that your ROI is sufficient that your capital investment is replaced fairly quickly as it does not sound like your investment will have much, if any liquidity to it.
If there are more details of this you can share, I'd be happy to provide greater specifics.