March 17, 2022
Don’t mislead your investors
This sounds like an obvious one, but it’s important that all of the information in your pitch-deck or other promotional materials is accurate to the best of your knowledge. Your investors have decided to invest based on the information you’ve given them, and are likely to ask for you to give them a “warranty” (a promise) that the information provided is true, accurate and complete. If the investor later finds out you’ve given them incorrect information, then they may have the right to sue you for return of their investment.
Don’t just rely on your consultants to prepare the information – the buck stops with you, so check everything carefully to make sure you’re happy with it and that it’s factually accurate.
Who’s in control?
We find control can be a sticking point on most investments: founding shareholders usually want to keep total control of their business, whereas some investors want to have the right to veto some decisions. This is a balancing act in any negotiation. Take a proportionate approach given the level of investment being made – if the investor is to receive only 2% of the equity, it’s probably not reasonable for them to have the right to veto key decisions. However, if they are taking a much higher percentage e.g., 30%, then they have much more of a vested interest.
Ultimately, be clear with your boundaries. If you’re not comfortable giving the investors the level of control they are seeking, then be prepared to walk away from the deal.
Information
Investors won’t typically have access to day-to-day financial information about the business, unless they are also directors. Some investors want oversight and will ask for an express right to receive financial information, in the same way as if they were directors.
Generally speaking, most businesses are happy to agree to provide regular management information (MI). However, be careful to agree sensible provisions (for example, MI to be provided quarterly) in order to avoid creating an administrative burden.
Dilution and preferential treatment
Some investors want to agree protection to prevent them from being diluted in a further investment round, or provisions which give them preferential treatment in some situations (for example, to be paid out ahead of other investors in the event of a liquidation).
You should think carefully about whether to grant such provisions, again bearing in mind the level of investment you are receiving, and any further investment rounds you intend to undertake in the future. It is always very important to think ahead when taking new investment.
Don’t just sign on the dotted line
This can be a trap, particularly for those businesses in the early stages of taking on investment. However, don’t just sign heads of terms or other agreements without taking professional advice, or at least reading them yourself. Some investors will include some key provisions in their heads of terms, and it can be difficult to resile from that agreement later on without being liable for their costs. At the very least it will make negotiations more difficult.
If you would like more information about the above or a related matter, get in touch with Siobhan Williams on swilliams@darwingray.com, or call on 029 2082 9124 for a free, no obligation conversation.
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