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Negotiating investment terms

Friday, 4 March 2016

Before you begin looking for an investment opportunity it’s important you know how to invest in a business. Once you are ready to make an investment in a business you must remember that the negotiation process is the start of a long-term business relationship so it’s crucial that the partnership gets off on the right foot.

Both parties should have the similar long term objectives and therefore the investment should reflect this and ideally it should be balanced. Previous experience within the industry you are investing in counts for a lot and most businesses will be looking for expertise as well as capital value.

Most investors will pitch their equity share between 15% - 30% but it can be anything from 1% to over 51%. An investor is less likely to be successful with a pitch of 51% or over because this would make the investor the majority shareholder which would grant them control of the company and the founders are unlikely to agree.  Furthermore, the founders need to remain motivated so it may not be in the investors’ interests to acquire a majority share in the company.  Therefore, it’s important that the investor weighs up the risk of investing in the company, while considering what knowledge they bring to the business before pitching an equity share in return for the investment.

An investor may also wish to negotiate additional terms for the investment deal such as milestones or lock-in provisions. Milestones can be used as a way of releasing portions of the investment at defined points during the business development. Investors use milestone clauses to reduce the risk of losing their investment and it helps keep the business focused on the long term goals. Lock-ins are most commonly found in start-up investment deals. Investors use these terms to prevent the founders from selling the business to a third party without the investor’s consent.

To ensure an investment is properly protected through business ownership and the investment deal is negotiated effectively you should seek legal advice from a specialist investment team. The business investment team at Rollingsons can ensure your investment is properly protected through business ownership and are experienced with negotiating the terms of the investment. 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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