Equity investment: The devil is in the detail
The idiom ‘the devil is in the detail’ couldn’t be more fitting when it comes to negotiating an equity investment and the associated agreement – a document that can be vital to the effective operation, growth and success of the company.
The investment agreement deals with the subscription for shares by the investors in return for the investment monies, while outlining the framework for the relationship of the parties.
Any investor will want to ensure they are suitably protected and look to include a contractual right to prevent shareholders taking key decisions without their consent.
This applies to management decisions as well as shareholder decisions, such as varying the rights attached to the shares, removing or appointing a director, or entering into capital expenditure exceeding a certain amount.
Additionally, most investors require an entrenched right to appoint a director and that a majority, if not all, of the directors appointed by the investors must be present for a quorum to allow board-level business to proceed.
The existing management team will conventionally also have an entrenched right to appoint their own director or directors. Alternatively, investors may want ‘observer rights’ allowing them to send non-directors to observe board meetings and to receive board papers, but not to vote.
Any investor will want to ensure they are suitably protected.
There are also likely to be certain reporting obligations, such as management accounts and financial models and budgets for upcoming financial years, which will need to be delivered before certain dates.
While some of these provisions may appear cumbersome, the investor is looking to protect their investment and ultimately, see it succeed.
It is imperative to understand what protections the investor is likely to want at the outset, but also what safeguards are realistically going to be acceptable to protect your position. Your legal advisor adviser will be able to guide you through this maze.