With so many exciting fast growing technology and other companies now in the UK and worldwide, many of these businesses are looking for investment through non-traditional routes, so private equity investment agreements have become more common than ever.
An investment agreement can take many forms – for a very early stage business which may only have 1 owner and where that owner invites just 1 or maybe 2 new investors to buy in, a shareholders agreement and amended articles of association may be the easiest way to proceed. Of course another key factor is always going to be who will have what shareholdings which in turn opens up vital questions about control and protection if the investor is a minority shareholder and doesn’t have or doesn’t want a directorship on the Board.
If an investment is contemplated where the business has already been trading for a while, is starting to gain traction and needs to accelerate this, an investor is likely to find the company already has a number of shareholders, a shareholders agreement and potentially bespoke articles of association, In this situation, it is often unlikely that the existing shareholders will allow a new minority investor to seek to renegotiate these documents.
Another scenario is where a company has amended articles but no shareholders agreement. One way to protect yourself as an investor in this scenario is to insist on an investment contract which is often in the form of a subscription agreement.
Before entering into an investment contract, due diligence is always worth considering. many companies will prepare a pitch deck but invariably this will highlight all the progress made by the business to date, which is great, but won’t cover some vital issues and questions. Depending on the answers provided in due diligence, some points may need to e included in an investment agreement. Another possibility worth considering, especially where other external investors are in place and where it’s difficult to get company level protections is to seek warranties directly from the company founders.
So, as with virtually all legal contracts and matters, much depends on the circumstances and the relative bargaining/negotiating positions of the parties. Below are some of the common things to consider in an investment contract :-
- Specific issues which should require investor rather than director approval and whether these need to be all investors, a simple majority by shareholding or other;
- General control issues and protections;Information/oversight at board level if the investor shareholder is not to have a board appointment
- Warranties either from the company or potentially founders regarding accounts, dilution, litigation and disputes and possibly other factual statements made to the investors.
- Exit – provisions which enable the investor to exit on reasonable terms.
- Information and potential input and/or veto on acquisitions.
- Protection from dilution and plans for future fund raising.
- Policy on dividends.
- The company’s strategy.
If you feel you would benefit from a chat about any of the above issues or need an investment agreement drafted or advice on a draft presented to you, get in touch. We have advised on lots of investment contracts and are affordable, practical and knowledgeable.
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