At some stage, many businesses will want or require additional investment, whether in the form of loans or external investment, with an injection of cash to grow the business in return for a dilution of equity. In a market where traditional bank finance is less obtainable with a commensurate rise in private investing such as crowdfunding, it is important to be aware that experienced and savvy investors will also look at non-financial issues when deciding whether to invest.
Among other factors, the credibility and investability of a business can be assessed by reference to how well the owners have understood the importance of legal issues.
We advise many investor clients and potential investees. Some of the key issues which can make or break a deal, can include :-
- IP protection – almost every business will now have intellectual property and for many businesses, IP is the most valuable asset. Failure to understand this or to take appropriate steps to protect IP, whether simply appropriate policies and procedures such as Data protection, Confidentiality Agreements and/or practical safeguards such as appropriate customer or supplier database security may well result in investors having major concerns as to business credibility, however compelling the business may otherwise be.
- Corporate structures – an experienced investor will expect you to be aware of the necessity to protect your business and assets – are you aware of legal and tax advantages and implications of a possible group structure ? If not, this could ring alarm bells.
- Employment law – Bribery Act, social media – if you employ people, the biggest risk to your business, however compelling it’s product or service is, is likely to be your staff. Do you have appropriate employment contracts, policies and procedures and does your business have good HR management and record keeping ? Are you up-to-date in your understanding of employment law and the business environment of tougher corporate regulation such as the Bribery Act ? Investors will want to be reassured.
- Terms and conditions – does your business have the right contracts for dealing with suppliers or customers ?
- Exit plan – a good indicator of whether the investee(s) is/are competent is whether he/she/they have been aware of the possibility of exit from the outset. Have you considered this ? If not, why not ? It may be indicative of inexperience or lack of business skills if you have not thought this through.
- Shareholder Agreement – if your business already has more than one owner, do you have a shareholders agreement ? If not, why not ? Failure to have such an agreement may indicate a cavalier approach to risk, an immature understanding of business risk or a reluctance to pay for important external; advice. It may be indicative of a degree of arrogance, that the business owners think they know best and don’t need experienced external counsel, making those people an investment risk to an external investor who will want to be properly protected and to be listened to.
- Demonstrate an understanding of law as well as business – simply having all of the above contracts, policies and procedures in place may not be enough. Many investors will want to test an underlying knowledge that an investee understands why they need such contracts and how to apply them. It’s one thing having a set of business terms and conditions, but if you don’t understand what’s in your contract and why it’s in there, this may be a red flag. A good example would be an understanding of the difference between business to business and business to consumer contracts, which clauses are fundamental terms and which aren’t, how damages may be calculated if the contract is breached and so on. This is a fundamental reason to obtain advice on your contracts and not to take the cheap option of simply buying off the shelf templates.
- Don’t do all of the above things at the last minute – an experienced investor will be able to easily tell if you have simply obtained all the right paperwork just before seeking investment. What most investors will want to see is that you have understood that these issues are vital building blocks for a successful and solid business and that as such, you have established the right foundations for your business from an early stage. Unfortunately, many early stage businesses take the view that they can deal with these issues later.
Whilst to an extent understandable based on competing demands for cash and priorities with an early stage business, cutting corners at the beginning may well come back to haunt you later.
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