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How to get the best investment agreement

Wednesday, 20 January 2016

There are many methods of raising capital for your business but securing an investment can be very difficult. This sometimes leads to businesses rushing into deals because they are keen to get hold of any investment without first taking the time to step back and assess the implications of the investment agreement and, critically, understanding the terms. Therefore, from an early stage you should make sure that you fully understand the investment deal that is on offer, take legal advice from a specialist team and pay particular attention to the key terms.

One of the most fundamental terms will refer to the amount of equity shares the investor wants in return for their investment. Most investors will ask to have equity shares in the company they are investing in and this can be anything from 1% to 51% or more. 51% would be a majority share and would mean the investor has control of the business but most investors do not want this so would usually pitch their equity share return between 15% - 30%.  That would allow sufficient remaining equity to enable the business to obtain further investment at a later date.

Agreements about business milestones are also common. This usually refers to the investor releasing portions of their investment as the business reaches each milestone. The milestones will be agreed in the investment agreement and investors use clauses such as this to limit the risk of losing their investment. This also helps keep the business focused on meeting targets.

“Lock-up” or “share consent” is often a crucial clause that investors include when providing capital for a start-up business. This clause prevents the entrepreneur from selling the business to a third party without consent from the investor. Investors are keen to include this clause because they will have based their decision to invest in the project largely on the founder’s passion and dedication to the business and may want them to remain as the driving force behind the business.

There are many more common investment terms and to achieve the best investment agreement for your business you must seek legal advice as they can be very complex and the future of your business is at stake. The experienced investment team at Rollingsons can offer impartial advice on the legal implications of an investment agreement and will help you get the best deal. We do not give generic investment advice, but instead give legal advice on the rights and responsibilities or investors and investees. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.

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