Related-party transaction

A transaction between a company and people or entities connected to its insiders, such as founders, directors, their relatives or businesses they control.

Example

A startup renting office space from a company owned by its founder.

Important

Such transactions may be legitimate but must be disclosed and checked for fair terms.

Related terms

• Conflict of Interest — A situation in which a person's personal or other professional interests could influence their duty to act in another party's interests.
• Disclosure schedule — The document in which a seller lists the exceptions to what they are formally promising - the litigation, the defaults, the contracts that are not on standard terms.

Lessons that explain it

• Messy books are common; hidden liabilities are the real risk — Early companies often have informal accounting. Diligence separates harmless untidiness from problems that matter: unpaid taxes, related-party transactions, commingled spending and unrecorded obligations. (10 min)

All 578 terms in the Investing glossary