Investors and your business
Investors form an important part of your start-up’s growth journey. In taking your start-up to the next level, you will likely require additional capital which may come from investors that have taken an interest in your startup company, ranging from angel investors, venture capitalists to strategic partners.
Investors can broadly be categorized as “passive investors” or “active investors”, depending on their level of involvement.
Passive investors typically provide funds but do not make day-to-day business decisions and may not have much ongoing involvement with the company. On the other hand, active investors do get more involved in making decisions and may also provide industry know-how and a valuable network; they provide not only capital, but also advice for your startup.
The bigger and faster you want to grow your startup, the more funding you will require, and that will mean bringing more investors on board. However, be wary, as the more ‘equity’ investors you have in your business, the more control you relinquish. Also take caution that active investors may have ideas for running your business that differ from your own visions and long term goals.
Investors can impact management of a company if they hold a significant number of shares (for example, 10% and upwards), a seat on the board, or both. Often, shareholders with a significant shareholding in your company can have the right to vote on key business decisions.
How is control decided?
Equity investors will hold shares,and therefore, the shareholders agreement helps manage how much control they have over business decisions. For example, the shareholders agreement may give an investor the right to appoint a director. This would give the investor more decision-making power inside the business.
The shareholders agreement may also have a list of ‘critical business decisions’ that require a vote by the shareholders. The required vote to pass the resolution may be a majority (50%), special majority (75%) or unanimous (100%) decision. Critical business decisions may include issuing new shares, borrowing money and changing the nature of the business (for example, the services or products on offer).
The list of critical business decisions and the required majority will influence how much control an equity investor wields in the business. For example, if critical business decisions require unanimous votes, you will need to find common ground on every decision. Therefore, it’s a good idea to pay careful attention to the number of directors each investor has been allowed to appoint, and what critical business decisions require their votes.
Decide what your deal breakers are
The right investor can be a strong ally by making introductions, providing industry know-how and guidance. However, an investor can also have different aspirations and ideas on running the business which may clash with your own long term goals.
For example, imagine that you’re considering whether to bring an investor on board who has aggressive growth plans and you require funding to continue and grow your business. You’ve been offered money and would like to get back to running your business, instead of spending time searching for funding. However, you have two reservations:
- Firstly, you and the investor are at odds at what rate to grow the business; and
- Secondly, you want to expand to a maximum of three locations in the next two years, but your investor wants to immediately open five locations.
What would you decide? Some have decided to take capital despite different goals and temperaments to their investors. Others choose to walk away and pursue capital raising options that are more consistent with their goals and timeframes.
While it’s unlikely that you and your investor will agree on everything, it’s worth considering what your ‘deal breaker’ points are. Once you know what is essential, you will be able to negotiate on other points. However, be wary if your starting position is so far apart that a middle ground is hard to find. Look at your long term strategic growth plans. Get the right guidance from trusted independent partners, including a trusted legal partner.
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