Documenting an Investment in Your Business
There are many options if you are looking to either invest or seeking investment. Michael Budd, Partner and Head of Company Commercial, discusses a few options. The documenting of an investment will depend on the identity of the investor and the amount of the investment.
What is an advance subscription agreement (ASA)?
This provides for the investor to pre-pay for their shares in a company but to receive their shares later. Some key terms are:
Discount – the investor will buy their shares at a discounted rate to acknowledge the risk the investor takes by investing in a company early and without a valuation.
Valuation cap –the purpose of this is to limit the maximum price for the shares being converted. This is so the investors are able to receive an adequate amount of shares if the company is valued above the valuation cap in the next investment round.
Funding target – this is an amount the company sets to achieve in investment during a future investment round that will automatically trigger shares being converted to the investor.
Longstop date – this is the date when the conversion of cash into shares will be triggered irrespective of whether a future investment round is achieved.
Tell me about a convertible loan note
A convertible loan note is a short-term debt. It is similar to an ASA. The main difference between these two documents is that an ASA is an equity agreement which means monies invested through this agreement generally cannot be repaid in cash, unlike a convertible loan note which is basically a loan agreement that could be repaid in cash or be converted into equity/shares at a later date.
What is an investment agreement?
There are some key terms:
Tranche payment – instead of paying for the entire investment at one time, investors under this agreement will be able to make part-payment of investment to a company from time to time. Generally, the investors are required to make tranches payments when the company achieves certain milestones.
Warranties – a warranty is a statement usually made both by the company and the founders that certain matters relating to the company are at the completion date.
Restrictive covenants – this is also known as a non-compete clause where it imposes a series of restrictions on the founders that they will not compete with the business of the company and not solicit the company’s employees, customers or suppliers.
Will the investor undertake due diligence?
This is not a legal document but rather a process. For example, if a company is seeking investment it will disclose all of the relevant information and documents relating to the assets and liabilities of the company to the potential investor who will carry out its investigation to inspect the information disclosed by the company and founders and the records of the company. This process is called due diligence. Its purpose is to make an investor beware of any risk that may be associated with its proposed investment.
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Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
This article was originally written for Inspire Magazine.
NLA article not to be reproduced.