- Term SheetsWhen you negotiate for investment at an early stage, it is normal for a “term sheet” to be negotiated with the investors. The conditions you agree to now will influence the whole life story of the company, so it’s useful to get advice at this stage covering issues like shareholder controls going forward.
- DilligenceAny investor or buyer will want to perform diligence before completing the transaction. This means that they will want to look at key financial records and accounts, existing contracts with customers, suppliers and employees, and corporate records. The better and more complete your documentation is, the more inclined they will be to agree with your valuation.
- Financial PromotionsWhen you offer shares to investors or purchasers you may be making what the law calls “a financial promotion”. There are complicated rules about what you can and cannot do. If you don’t follow these rules you could end up with the transaction being set aside – or worse still you could face criminal penalties. This is one area where it pays to take advice.
- Shareholder ControlWhenever you take in investment your control over the company will decrease. It’s important to think this through at the time and look carefully at any proposed restrictions. For example do they restrict you from raising further money? Or entering into particular types of contract? Or changing the business? Are these controls customary for this kind of transaction? It’s worth checking…
- Share Holder Rights and DilutionInvestors will often ask for favoured or preferential treatment when it comes to looking at a sale of the company, paying dividends or liquidating the company. They may also try to make sure that their share ownership is not diluted in the event of subsequent investment. You need to carefully consider these provisions when they come up, as agreeing to them may put off other investors who come in during later rounds of investment.
- Providing Accurate WarrantiesYou will be asked to make all sorts of promises or “warranties” in any funding document. It may be tempting to take a “seat of the pants” attitude to these promises, but you could open yourself up to criminal or civil legal action if you make statements which are misleading or not accurate. So, it’s worth making sure that anything you say in the funding agreement can be backed up with financial or documentary evidence.
- ExitsThis is the most important moment for any SME. You want to be able to control it – but larger investors may try to say that they have the right to force or block a planned exit. Are you happy with this? Equally you need to be able to make other minority shareholders sell if you are sure that the exit moment has arrived. These are critical provisions to address in a funding agreement.
What Happens if you Leave?