Please feel free to review the annexed:-
http://www.entrepreneurhandbook.co.uk/guide-to-contract-negotiations-with-investors/
The text of which should be :-
Entrepreneurs
- Contract Negotiations with Investors
Having found an investor proposing to invest in your business, your
attention needs to turn to the documentation that you are likely to need to
reflect your agreement.
Firstly – Make sure that you have a clear understanding of the outline
terms of investment (prepare a non-legally binding ‘Heads’ or ‘Term(s) Sheet’ -
that you both agree with).
At the very least, your investor is going to want to see that their
ownership interest (in shares) is properly documented as issued in the investor’s
name. This (in itself) involves a
certain amount of paperwork- although it is not unheard of for an investor to
subscribe to shares merely on the basis of the broadly standard constitution of
an English limited liability company (i.e. the Companies Act’s – ‘Model Articles
of Association’).
However, if your investor is to hold a minority stake, and / or not be ‘hands-on’
(i.e. actively involved on a frequent basis) with the company in which they are
investing, it is likely that they will seek some element of agreed investment documentation
to protect their interests.
As a founder of the business - you want their money, such that you may
find yourself presented with a ‘take it or leave it’ proposition.
The worst thing you can do in such a situation - is simply accept the
terms on offer, particularly if you are not to consider them in any detail (with
the aim of seeking to know what you are agreeing to).
Budgeted Legal Review
The problem is that in early-stage / venture capital type investment
transactions, the sums of money being invested are generally quite modest and
do not leave much of a budget for legal advice on the proposed investment documentation.
Accordingly, an investor’s initial position is generally to resist the
founders taking legal advice on investment documentation – largely because it
is the investor’s money which directly or indirectly is likely to be paying the
legal fees.
However, as a founder you should seek to persuade the investor that such
an attitude is counter-productive, and that it is much better for you to gain a
full understanding of (and agree to) the detail of the investment documentation
you are proposing entering into - if a sound on-going relationship is to be
created between you.
Lawyers (like many other in service industries) tend to base their
charges upon the amount of time which they spend considering and advising upon
matters that they are consulted in relation to.
Experienced lawyers should be able to agree with you an (estimated or)
budgeted fee for work to be undertaken (in light of what interested parties
consider to be sensible for the work).
Having set your budget for legal review, make sure that you get the
maximum value out of the legal advice you receive. For example if your budget only buys a
limited amount of time from your legal adviser, make sure that they take you
through the documentation (on a ‘page turn’ basis) so that you fully understand
the terms which you are being asked to agree to. A good adviser should know and have seen the format
of such documentation before, know what is reasonable market practice (and what
is not), and know the issues which need to be explained to you. If there are any commercial / legal terms
which you have objection to, often the most effective way to resolve the issues
is to discuss matters directly between the founder and the investor – with the
hope that a compromise position can be found.
As founder you need to be aware that an investor has a range of legitimate
protections that they will reasonably require in the documentation (e.g. that
their likely minority position will not be abused by your continuing majority
control of the company in which they are investing).
Certain other provisions might seem unfair to you at first glance, but
with appropriate revisions and careful drafting, you may well be able to accept
them. Falling into this class of
provisions might be the well-known "leaver provisions", whereby if a founder
were to leave the company at some point in the future, your shares become capable
of re-acquisition by the company etc. The
investor will want to know that you will continue to be actively involved in
the business – thereby protecting their investment on an on-going basis. If you cease to be involved in the business
in the future, it is arguably fair that you should potentially receive the
value which you have created to that point in time, but arguably not that you
should be able to continue as a ‘sleeping partner’ in the business.
Having accepted that the investor may well have legitimate reasons for
wanting appropriate documentation, interested parties should then aim for the
documentation to be drafted and settled efficiently and cost effectively. Legal documentation (in the writer's opinion)
should generally be drafted on a basis of being fair and reasonable.
Generally, the investor’s lawyers will prepare the documentation
(although it is possible for the company to give instructions for the lawyers
to prepare what is intended to be market practice documentation - which is
intended to assist with the taking of investment, and which are designed to be
sensible even-handed documents between the parties).
Generally, the investment documentation will comprise (i) articles of
association and (ii) an agreement (often variously described by a combination
of the words ‘investment’, ‘subscription’ and/or ‘shareholders’ agreement).
Articles of Association
Every company has articles of association – often comprising the Companies
Act’s ‘Model Articles’ (with small amendments), which are generally adopted by
default upon incorporation.
Articles of association can be considered as akin to a ‘club
constitution’ – legally comprising a binding agreement between the company and
the shareholders from time to time.
Such a document can be quite impenetrable to a layman – and largely for
this reason, in certain early-stage investments, specifically drafted articles
of association are not prepared.
However, if new articles or revisions to the articles of being proposed,
you should treat this document as the primary document which you first
review.
Lack of familiarity with articles often means that people choose not to
read that document – and for this reason (and the reason that certain share-based
rights are more easily enforced through the articles of association) – many of
the more onerous provisions in investment arrangements are often included in
the articles.
‘Subscription and
Shareholders’ Agreement
The other document which is generally utilised as part of the investment
arrangements is a separate written agreement – generally a much more accessible
document (for those who deal with the same) – and prepared in the format of a
private agreement between the founder and the investor (generally with the
company also a party).
Model Documentation
The internet has assisted such arrangements in many ways, including the
fact that early-stage venture capitalists – and others active in the market - now
have easy access to basic documentation which is considered to be market
standard. One example of this is the
early-stage venture capital documentation produced by the British Venture Capital
Association (B VCA) and which is widely available on the internet : –
Before you enter into investment arrangements, it may be useful for you
to try and review the articles and the investment agreement at the link above,
so that you can understand the type of arrangements which you may be subject
to. Please note however that the
documentation set out above is quite detailed and complicated, and there are a
number of less accessible but nevertheless widely recognised documentation
(often based upon the above documents) that lawyers can easily gain access to. Use of standard (or recognised) documents
greatly assists with a rapid and efficient investment, and hence - one drafting
approach is to ensure that a particular set of model documentation is used in
preparing drafts and then reviewed by lawyers (with the amendments proposed
made to the standard documentation clearly show). This removes a lot of time from the
consideration process, so that the detail can be focused upon by those who
review the documentation.
The above review only "scratches the surface" of the subject –
but we hope that it gives you an understanding of the process and documentation
you are likely to need to be subject to.
If you would like to discuss matters further, please do not hesitate to
contact the writer so as to do so.
Principal & Consultant Business Lawyer
(+44) 07788 537
187
(U.K. Mobile / Cellular Telephone)
Equitable Law is a London based (but nationally and
internationally focused) boutique legal consultancy firm, providing the
business law advice and assistance services of Mr. Dan Johnson.
To find out more, please visit :- EquitableLaw.com
