Contract with investors

My question is this, I have a business idea and am about to go into partnership with two different investors. What should be my point of focus, and areas I should concentrate my request/demands on in signing the business contract?

Thank you for your speedy response.

Answer

I would suggest all the information that is discussed in your business plan needs to be at your fingertips before you meet investors. I also suggest you should have a legal advisor on your team.

Be prepared for the negotiation to take some time to complete, as experienced investors will not draft contracts or commit funds without first seeking legal advice from their own advisors. You will need to be patient, strategic and prepared to answer all types of questions during the negotiation.

Most seasoned investors will have their own contract and will want you to adhere to that. There will be free templates available on the internet

In the meantime, you might use a term sheet, or letter of intent, which is a statement of the proposed terms and conditions for the investment. It will also define the timeline and process up to the contract date, and the conditions for completing. Again, these are available free on the internet

Remember that you are hopefully gaining not just financial investment but also business expertise from your investors. Are you confident in their judgement and opinions, and also that all of you can work together?

You may already have an operating agreement, or memorandum of association, or partnership agreement, the legal document that defines each of your rights and responsibilities within your company. You need to revisit it in the light of your potential new agreement.

How are decisions to be made? Are they financial investors, or will they be involved in management? In the event of a difference of opinion, who’s opinion will prevail? What are the voting arrangements?

You ask what points to consider. First of all, who is drawing up the contract? And paying for the legal fees involved?

The first point you need to write into the contract is what monies are to be invested and when.

Then you need to consider the shareholders agreement and the share capital structure.

You need to include the equity arrangements you have agreed. Will the investment be in the form of ownership of part of the company, with share of the profits, or a debt? Will shares be ordinary or preferred, have you considered the tax implications of each type

If the investment is to be considered as a debt, what is the payback period and is there any flexibility in this?

What is the exit plan?

If there are any resources they are prepared to offer you such as use of office space, access to their professional advisors, that needs to be documented

What are the plans if the business struggles and fails to make expected profit? How will the business be dissolved?

What role do the investors play in the management of the company? Will they have a seat on the board?

Don’t forget to ask them to sign a Non-disclosure agreement (NDA) if you deem it necessary

This is not an exhaustive list, as there will be other factors dictated by your particular business and circumstances, which should become evident as you work through the details.

Best of luck