In Show 052 – Agreements with Investors originally broadcast on Facebook Live on Wednesday 17 January 2018 we explore this interesting topic.
Today on the podcast we discuss the importance of agreements with investors. This is part of Phase 6: Maximizing your business and bringing in investors. Too often we have seen companies that have brought on investors without a clear agreement. Those investors are usually friends and family if its a young business. That can create huge numbers of problems both financial and personal. Before anyone takes a share of your company you need an agreement that details all aspects of the business. It’s not a simple document. It’s extremely complex and requires a high degree of legal skill to craft for every business. Among the details that need to be clearly articulated:
1. What happens if the business owners leaves, dies or becomes chronically ill?
The owner of the business is usually the life-blood of the operation. If they become sick or incapacitated in some way that can cause major problems. There needs to be a transition plan in place which can include a buy-sell -option agreement. That is essentially an insurance policy that is put in place if the owner becomes sick or dies.
2. What happens if the founder starts another project similar to your business?
This is important because it protects the company from unfair competition from one of the people in the ownership group who may want to leave the company and enter a similar sector.
3. What happens if you need another partner?
If the business continues to expand you may need additional investment from another partner. Before that happens the details of how that will happen needs to be worked out with the current ownership group.
4. What if a partner isn't putting in the time?
It’s possible that someone in the ownership group will become distracted by another job or interest and is no longer putting in the time and effort into the company. The responsibilities of everyone involved in the company need to be clearly spelled-out.
5. What happens if there are disagreements among shareholders?
Just like a marriage everyone gets along great at the start of a new business. That isn’t always where it ends up. A dispute management system needs to have been agreed upon by all parties long before the operation gets under way.
5. What happens if there is a deadlock after a vote?
This is especially important if there is a 50/50 ownership split. It’s possible that a major decision will end in a deadlock. You don’t want to wait until that happens before you decide on how to resolve that kind of dispute.
There are many different types of shareholders agreements An early agreement can be used for start-ups and will deal with the fundamentals. This kind of agreement is great for the start of the business but it is not something you want to leave for thirty years. It should be reviewed at least every two years or so. As the business grows and changes for should the investor agreement.
When you start out you may only have one or two employees. When you bring on investors they may want a seat on the board of directors. That is going to require an agreement that details how that board is going to operate. How will elections take place? What voting rights do members have? These minute details are really important. Those procedures need to be clear and practical.
Joint ventures a re different from a shareholders agreement. They are necessary when two companies come together. It’s more like a partnership. Transferring of shares and dispute resolution clauses are equally important in this kind of agreement.
Another kind of agreement that is popular for start-ups is a loan agreement. This allows you to get a fresh injection of cash without giving up any equity in your company.
More about this Show
We started Business Legal Lifecycle to create a simple way for you to understand complex legal terms. Most importantly we want to help you to develop a plan to take your business successfully into the future. There’s a startling statistic the underscores the importance of developing a solid plan. The majority of business owners are just seven months away from losing everything. A single aspect of your business that is not set-up correctly can shut down your whole operation very quickly. Legal advice is not cheap and even when you can afford it there is often a divide between lawyers and their clients. We want to close that gap once and for all. We want to put legal knowledge and tools into your hand to prevent the worst from happening to you.
Twice a week we are going to deliver those tools right to your home or office with Business Legal Lifecycle TV. We’ll start the week with Fast Fix Monday, a short 5-10 minute video that will tackle a single issue that businesses have to deal with. Then on Wednesday’s our main show will feature with more fulsome discussions and interviews all delivered in a straightforward and easy to understand format.