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Investor angels or demons: do their priorities match your own?

22 September 2009

Securing investment for your business is stressful and difficult in the current economic climate. It is easy to get excited at the prospect of an investment, only to lose sight of who is actually putting the money in.

So it is crucial to understand the impact investors’ priorities may have on your exit plans.

The most common type of development capital investor is a ‘business angel’, usually a high net worth individual with a great deal of business experience.

Remember, these angels often have a number of investments on their books at any one time, and while they may offer you a considerable amount of their time and effort, they might not be exacting about what that will entail. It is important to agree a specific number of hours they will spend working with you in any one month, and exactly what resources they will provide.

You should also consider the worst case scenario: What happens should your business angel become bankrupt? Will you be obliged to effect a transfer of their shares? What impact will that have on your operations? 

Also consider provisions in the investment agreement which cover your angel’s divorce, death, and them simply becoming ‘bored’ with your business. And maybe their ideal exit timing does not match your own. So they can help protect you against such eventualities, it is important to involve your lawyers at an early stage.

Investment in your business may also come from a company, maybe one set up by an angel or venture capital provider, and used specifically as an investment vehicle. Again, consider what would happen in the event of an insolvency.

The shares in your business would be an asset of that investment company and any administrator of that investment company would then have the right to effect a sale of your shares. Your lawyers can help protect you by drafting an investment agreement appropriately. 

You should also undertake an investigation into the nature of the investing company. Does it have assets other than the shares in your business? Do the accounts show lots of cash flowing in and out?  What if you were to require additional subscription sums from shareholders? Would the investing company be able to provide this? Also take into consideration the way in which that company invests.  What does it look for and can you offer that?

As your business matures you may take investment from development capital or private equity funds.  They may have an intention to exit your business within a set period. What impact would that have on you?

Current economic conditions dictate that private equity interests look, wherever possible, to exit existing investments in order to repay investors who have made cash calls on their own investment into the private equity fund. This could be very bad news for your business if you are obliged to sell to an unpalatable third party.

Much of this concern can be covered off at an early stage by understanding the nature of the fund investing into your business and the individuals operating it.

Getting close to the fund managers and understanding their business priorities will be very important in establishing a secure shareholding structure. Your lawyers can help you position yourself and your business to anticipate many of these issues.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

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John Finnemore

Solicitor
T: 03700 86 4099
I: +44 (0)121 625 4099
E: john.finnemore@shoosmiths.co.uk