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Preparing for investment - making the most of your ideas

18 March 2010

You’ve developed an innovative product. Whether a simple consumer item, a hi-tech solution or a social gaming website, you’ve shown it’s different and exciting.

Hey, you’ve even got yourself some publicity and a listing on Younoodle. But now what?

As far as venture capital investors – private equity and business angels – are concerned, all the above is a given.

What they will want to see are a number of other elements in place, too. So you will need to consider the following:

Straightforward share structure

Non-cumulative preferential dividend ordinary shares are useful in major organisations and complicated investment structures, but they do not sit well with individuals seeking to invest in a business.

Complicated layering of share rights will also make it more difficult for investors to seek EIS and VCT relief on any investment they intend to make. You will find yourself unravelling a great deal of your hard work in putting these structures together in the first place if you are seeking such investment.

Simple processes

Complicated board decision-making and shareholder rights will only cause difficulty for future investors.

First round investors who gain these rights are unlikely to want to give them up when asked to do so by larger institutions.

Remember, your company may need more than one round of investments and any complicated or excessively generous shareholder rights you put in place now may need to be unpicked later.

Understand your investors

Make sure those who are investing money in your business know and understand that they will need to take dilution at some point in the future, and that they are invested for the long haul.

An investor who is only willing to provide support for a year or two may not be the kind of investor you want at first round. This will be a particular issue where that investor seeks an entrenchment of their shareholder rights in the articles of association.

Be careful what agreements you enter into

Understand that your investors will want to see that you have solid revenues (or at least the potential for them) but will be alarmed by any contracts with customers that are onerous or uncommercial.

Be sure you are able to justify exactly what contracts you have entered into and why. This applies to employees as well; there is no point attracting the best members of staff on terms that scare off investors.

Always take legal advice

It is imperative that you do not do anything likely to make you unattractive to investors. Legal due diligence will show this up all too readily. If in doubt, get advice.

Shoosmiths has a great deal of experience in advising both investors and investee companies on these types of investments, and will be more than happy to assist you.

© 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