From the very outset of launching your business, the value of having proper terms and conditions in place cannot be overstated.
It’s important to highlight where terms and conditions are invaluable in protecting the interests of those investing in your business.
External investors such as venture capitalists are taking a financial risk when investing in your business, so it’s only right that you should lay the groundwork to do right by them – both today and in the months and years ahead.
The legal side of fundraising as an ambitious, growing business can be a daunting prospect. As an exciting start-up that’s gaining traction, it’s hard for entrepreneurs to dedicate the necessary time to ensuring the essential legal documents are ready to facilitate a fast, pain-free funding round.
Whether it’s a founders’ agreement, an intellectual property assignment agreement or a non-disclosure agreement, these documents are vital to protecting not only the value of the company but your new investors who’ll know exactly where they stand.
From fundraising to onboarding a team and giving share options, there are increasing ways for innovative start-ups to get fast and affordable support when growing their businesses. Many of these tasks have historically cost thousands of pounds in fees, which have been inhibitive for start-up growth all too often.
However, start-ups of all shapes and sizes now have access to firms that can make legal admin easier when launching a funding round and other legal documents. There are companies out there now willing to offer efficient and templated documentation that ensures full compliance for businesses and total reassurance for investors in a matter of minutes.
It’s a similar story for employee onboarding, with online services geared towards personalising and automating the process based on seniority, workplace, or department. Efficiency is ultimately the name of the game.
T&Cs help to frame your next investment
The terms and conditions of any angel investment help to define how an investor can invest in your business. That’s because the way an individual or group invests in your business can significantly alter the deal you’re negotiating.
Is it a conventional equity investment where an investor secures a percentage of the business based on the valuation of your start-up at the time of the deal? Or is it a debt security investment whereby they are paid a percentage of your overall revenue – regardless of the final profit total?
While equity investors are only paid out when your firm turns a profit, debt security investors are paid back, no matter if your business is still in the red each year. The distinction between these two investment frameworks is vital in the terms and conditions of any funding round.
Defining preferred or common shares
The terms and conditions should also clearly define whether a new investor’s shares are ‘preferred’ or ‘common’. Common shares put them on a level playing field with you, the business owner. It gives them the same number of votes as all other holders of common shares.
Preferred shares give them greater rights and control, with preferred shares governed by a totally different framework. Preferred shares are typically dished out to those making substantial investments or adding immense value to the company in other ways such as their existing industry reputation.
A clear definition of an investor’s shares also helps you to understand what you’re ceding in terms of profits and shareholder control.
Protection against share dilution
Investors making an equity investment in a company will receive a set percentage of shares in a growing start-up. Let’s say, for example, that they receive a 10% shareholding in the company.
In the years ahead, if you secure additional outside investment and sell new shares of your company, the previous investor’s ownership percentage could be diluted to less than 10%.
An anti-dilution protection clause can be invaluable in the terms and conditions of any funding round. It gives the initial investor an opportunity to acquire additional shares whenever they are at risk of seeing their ownership percentage diluted by additional investment. They’ll also be able to buy these additional shares at the same price they were originally offered at (depending on the agreement).
Terms and conditions should be the bread and butter of any growing business. Investments are a serious business. Forget the dangers of oral agreements and clarify the clauses that will define your start-up for years to come.
