Insurance 22 May 2017

Is your small business legally prepared for investment?

Investors want a transparent and simple structure to operate in

If you are thinking about securing capital to take your business to the next level, are you legally prepared for investment? Here, Karen Holden, the founder of A City Law Firm, gives readers her advice.

Whilst you may have been trading for some time or have a product ready to launch, an investor will want to know that your business is protected against potential threats. So, what do you need to have in place to be legally prepared for investment?

Company structure

Some businesses are set up for tax efficient purposes, for example by adding their wives, husbands or partners, or by creating complex structures and trusts. However, these can cause issues and confusion later down the line with incoming investors.

To avoid this, make sure your legal documents are done correctly and reflect your accounts and the true running of the company.

You would be amazed at how many companies make errors here that takes time to unravel, and if you get the attention of HMRC, your plans could be delayed.

Investors will want a transparent and simple structure to operate within, so consider the benefits of SEIS or EIS, reliefs and grants.

Business plan or shareholders agreement

If you haven’t already done so, ensure you have a shareholder’s agreement in place. This agreement is your platform to develop and convince investors you have set achievable goals and you are all in sync with the transaction.

A shareholder’s agreement should cover:

  • Roles and responsibilities for each founder, voting rights and share capital
  • What happens if leaves, retires or is unable to work. An investor will expect to see non-compete clauses
  • How a sale, merger or investment will be decided and if this is what you each want and when
  • What happens if one founder is not living up to their expectations
  • How a dispute between founders will be resolved
  • Where you intend to take the business in three to five years

Intellectual property protection

This is a valuable asset for most businesses and an investor will want to see your IP portfolio and be clear you own the IP outright. Registered IP shows a potential investor the value of your company, offers them comfort in what they are investing and can act as a collateral for their money

IP Protection tips

  • Have a comprehensive non-disclosure agreement in place
  • Ensure third parties helping to create your IP/or products assign full ownership rights to you after works are complete
  • Ensure employees sign a non-compete clause to avoid risk of selling IP to competitors
  • You can permit someone else to use your IP and pay you a royalty for this right (franchise arrangements and software license)
  • If IP is a valuable part of your business, engage the services of a monitoring service to regularly check for infringement
  • Secure trademarks in each class and territory you intend to trade 

Consumer/client conditions

An investor will want to see a copy of your terms and will ask if you have had any complaints or claims and if so how you resolved them. This is an investor safety net, as it is yours, so it must be comprehensive. Any good contract will as a minimum contain.

  • How your services/products are delivered/stored/created
  • How disputes will be resolved, usually arbitration or mediation is included
  • Any representations and warranties are clearly set out and everything else excluded
  • Price, rights to cancellation, refunds and returns are made transparent
  • Who owns the Intellectual Property Rights and how these are to be used
  • Payment terms and debt recovery terms (interest/costs recovery important for cash flow)

Consider your options

If you are looking to secure investment, do not get pressured into making the wrong decision. Meet different advisors, explore all the options, understand what is available and what each practically will mean for you.

What may appear too restrictive to a lawyer or accountant may still be worth the risk to your expansion, on the other hand what may appear a dream offer could come with too many strings – juggle advice against what you need carefully.

You do not have to give control of your small company away. If you are concerned about giving shares away consider there are other options available to you such as bank loans, social grants and joint venture agreements.

Being legally prepared for investment means you can develop and expand quickly and painlessly without the usual risks affecting other businesses and give your investor comfort.

Karen Holden is the founder of A City Law Firm, awarded Most Innovative Law Firm London 2016. 

Don’t keep investors in the dark, they might be crucial to future success

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