Share Investments Standard Requirements

When you are looking for investment funding, it’s important to understand what the people you’ll be seeking investment from will be looking for in return for parting with their cash.

As well as the way they’re likely to put a value on your company and negotiate the price they’re prepared to pay for shares, they’ll also want to put conditions on their investment, both to protect their rights and ensure the responsibilities of directors and shareholders are clear to all.  Many of these are standard for most investments, and to help you understand what they’re likely to ask for before you talk to them, here is a list of the more common conditions and terms used in documentation used with investments.

It's not exhaustive and is intended as a guide only, but it should help you anticipate what to expect and thus plan more effectively for your discussions with potential investors

  • Warranties: these are assurances given to investors that the business in which they are investing is what the company and management say it is. These assurances will be given by the company and executives and will be tailored to the terms of the investment and subject to market-standard limitations including, for example, caps on liability and time periods for bringing any claims for breach of warranty.
  • Investor consents: a list of decisions that the company will need to seek investors’ approval for in advance of implementing them. This is required in order to protect the value of their investment. This list will typically include matters such as: (i) issuing new shares; (ii) amending the business plan; (iii) changes to the board; and (iv) selling the business, etc.
  • Right of First Refusal on Subsequent Investments: all shareholders, including the founders, should have the right (but are not obliged to) to invest in future financing rounds in advance of any proposed new shareholders to allow them to avoid being diluted (i.e. reducing their percentage shareholding of the company) and to allow them to continue participating in the success of the company.
  • Right of First Refusal on Share Transfers: if any shareholder wants to sell their shares to someone else, the existing shareholders shall have the option to buy those shares before they are offered externally.
  • Drag-Along: If shareholders owning a significant percentage of the shares of the company (the percentage of which will be determined in each deal based on shareholder composition post-completion) want to sell their shares then all other shareholders can be required to also sell their shares on the same terms. This provides significant shareholders/investors with some comfort around their ability to exit and helping facilitate a smooth exit process.
  • Tag-Along: If certain shareholders (typically those holding a certain majority of the shares in the company but determined in each deal based on shareholder composition post-completion) want to sell their shares then all other shareholders must also be given the right to sell their shares on the same terms. This provides minority shareholders with some comfort that significant shareholders/founders will not exit the company and leave them behind.
  • Restrictive Covenants: Investors don’t want any key personnel of the company to start a competitive business or to leave and take team members with them to another business even if it’s not competitive. For this reason, the investment documents will normally contain restrictions which prevent them from doing so. These restrictions will apply for the duration of the relevant person’s employment by the company and for an appropriate period (determined on a deal by deal basis) after that. Investors often expect restrictive covenants to be included in both the investment documents as well as the service/employment agreements of the key personnel.
  • Leaver Provisions: Investments are made based on an assessment of the company and of the people running it and investors therefore seek protection against the management leaving the business. They are fundamentally investing in the management team to fulfil the business proposal put to them. The investment documents therefore include leaver provisions which provide that if any member of management should leave the business, then they can be required to sell their shares at a price to be determined (typically based on the circumstances under which the relevant founder leaves).
  • Board of Directors and Observer Representation: Investors normally require to be granted the right to appoint a non-executive director to the board of the company. They may not elect to exercise the right to appoint a director. However, where they do so they will seek to appoint an individual who they believe is an appropriate fit for the company, and the company will be required to bear the cost of remuneration of this person.   In addition, investors may also require the right to send an observer to attend board meetings of the company, with such attendance being potentially by phone or in person.
  • Information Rights:  In order to manage their investment, investors need regular information from the company including: monthly financial reports together with copies of the company’s annual accounts, the business plan and certain other information which may be requested from time to time. Sometimes investors will provide a template for the company to use in supplying this information, so it is in the preferred format of the investors.
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