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Home » Running a Business » Legal advice » Investment – are you legally prepared?

Investment – are you legally prepared?

How do you get future investment to take you seriously

by Owen Gough19 May 2017

Here, Karen Holden, founder of A City Law Firm, guides us on how to safely and legally secure investment for your business.

If your business is ready for expansion and you’re thinking about investment, are you legally prepared for it? Do you know what an investor might want to see and is your ‘house in order’?

Whilst you may have been trading for some time or have a product ready to launch, an investor will want to know that you have spent money wisely in protecting the business against potential threats.

There are several key components you should have in place if you want an investor to take you seriously.

Business plan and shareholders agreement

You should, if you have not already done so, agree terms with your co-founders in writing. This agreement is your platform to develop and convince investors you have set achievable goals and you are all in sync with the transaction.

Key terms of the agreement should cover:

  • Roles and responsibilities for each founder, voting rights and share capital;
  • What happens if a founder 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;
  • Where there are minority shareholders whether you should have drag and tag along clauses;
  • What happens if one founder is not living up to their expectations;
  • How will a dispute between you be resolved?
  • Where do you intend to take the business in 3 years, 5 years etc. An investor will want to understand your objectives; see that you are in agreement and then work out terms with you going forward on the same basis. A transparent starting point will make an investor comfortable. They will see that all the founders are clear about their roles, objectives and strategies.

Any investor will seek to add in their own terms and will have their own objectives for your business so you must all be clear about what you want to minimise the risk of a dispute between shareholders at a later point.

Company structure

Some businesses are set up for tax efficient purposes, for example by adding their wives/husbands/partners or creating complex structures and trusts, but 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 some 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/EIS, reliefs and grants.

Consumer or client conditions

Sounds obvious but it is usually the one thing that is done using a template or is out of date by time you are ready to progress.

As you expand or move into territories outside of the UK these can cause tremendous problems. There are many rules when contracting with consumers which can cause significant problems (including criminal liability and unenforceable terms) if not included.

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 investors 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)
  • Limitation of liabilities as far as permitted by law

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 this 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 monies.

I have seen several horror stories when it comes to IP. In one situation, a significant amount of money had been spent on branding but the client had not registered these until five years later when an investor requested this, and the application raised a flag to a large overseas company with the same trading name who had registered this in the UK. The company tried to fight but lost and had to re-brand losing the investor as well as money and goodwill.

If you have truly invented something unique you should look to register a patent as soon as possible. Whilst awaiting registration it is critical that you do not disclose the invention to anyone or you may harm your chances of registering for a patent.

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

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 company away. If you are concerned about giving shares away consider there are other options available to you such as:

  • Bank loans with low interest rates which are presently available;
  • Debt financing such as corporate bonds;
  • EIS/ SEIS as tax incentives for investors
  • Joint venture agreements
  • Government and social grants
  • Tax reliefs
  • Other investments

Summary

The money you can save by getting your house in order and having the best possible tax and legal advice 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 and listed in Legal 500.

Further reading on business investment

  • UK SMEs are investing in digital transformation for faster growth

Nominations are now open for the British Small Business Awards7, the leading event celebrating the brightest stars in the SME sector. Click here to enter, and make sure you get involved today using the hashtag #BSBAwards. Good luck!

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