Growing your business – private investment advantages and pitfalls

Private equity and investment legal advice For businesses requiring additional finance, venture capital (also known as private equity finance) may be an attractive option. It may be that you have sought but can’t obtain bank finance, perhaps you are looking for experienced investors in a specialist business, you may be looking to push through a

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Private equity and investment legal advice

For businesses requiring additional finance, venture capital (also known as private equity finance) may be an attractive option. It may be that you have sought but can’t obtain bank finance, perhaps you are looking for experienced investors in a specialist business, you may be looking to push through a Management Buy Out (MBO) or Management Buy In (MBI). One of the attractions of seeking non-bank investment is potential speed, especially with the advent and increasing popularity of crowdsourcing.

Preparing to seek external investment in your business

To impress potential investors you not only need to have a great product or service but you also need to show that you know how to run your business. This will generally mean that you will need to demonstrate that you have a compelling business plan, understand legal and financial risks and have good business acumen. seasoned investors will look as carefully at these aspects. often in great detail, as they will the strength of your product or service. So, expect to be scrutinised, which means if you don’t have your act together, in terms of having the right contracts, such as shareholders agreements, business terms and conditions and employment contracts, you are likely to struggle to convince any shrewd investor to invest in you.

Possible complications with new investors

The main difference between venture capital and bank finance tends to be that a bank will loan money. It may well take a charge on shares and want to keep close tabs on how the business performs but with venture capital, the investors may want a whole lot more. They may seek a guaranteed return on investment, may require preference shares (meaning that the investors receive dividends first or possibly even at the expense of ordinary shareholders), may well want to install a director onto the board of directors.

Aside from negotiations relating to control of the business post investment, it is likely that expensive work will need to be undertaken to reflect all of the above, such as a new shareholders agreement and potentially alterations to the articles of association. The existing owners may well need to take advice, especially if they no longer have effective control over the company or potentially even end up as minority shareholders.

Related issues where you can find useful content elsewhere on this site include shareholder agreement advice and information about shareholder rights.

What we offer

Our corporate team -see also our commercial law section, headed by David Swede, offer highly experienced and cost effective advice on all aspects of venture capital and investment. Whether you need to get your business ready for investment or are involved in negotiations, whether as investor or investee, we can help. We have a lot of experience of management Buy Outs and Management Buy Ins and provide a genuine alternative to the major city law firms whose charges may not be proportionate to the transaction.

commercial law • David Swede

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