So, if you want to move forward with investment from those who want to help you build your business, you need to make sure you have all of the tools in place first so you don't lose any of your rights or control.
The Investment Terms
There will always be some room for negotiation, as is a standard business practice, but there is no guarantee that investors will accept all or any of the terms you request. As a startup founder, you must weigh the potential of the investment to transform your business against the risk of losing control and possibly even the value of your equity.
At this stage, there are no risks to be taken. If you're happy with the terms you want investors to agree to then you can proceed with those terms.
A list of terms founders should be on the lookout for
Here is a list of investment terminology you should be aware of in order to keep control and, more importantly, safeguard your business:
- Right to be a director (or to appoint one of your choosing)
You will almost certainly already be a director of the business as a founder, and this is a position you will want to keep for as long as you own shares in the business.
You'll want to double-check if the right includes the option to designate yourself or someone else. By including this right, you will continue to have influence and will be fully informed about the business.
- Restrictive Covenants
There's little point in not having them if it means you can leave the company at any time - possibly to work for a competitor.
Restrictive covenants are designed to protect an investor's investment; however, they also work in reverse, ensuring that an investor stays on board for a set length of time.
- Drag Rights
If, as a Founder, you have ensured that your 'drag right' is incorporated in the Articles of Association – and you intend to remain the majority shareholder for a prolonged amount of time after your investment – you will continue to have a say in the decision-making process.
You, as the majority shareholder, are still in a position to carry out the transaction if you so desire. You wouldn't be able to perform this step unless the company's Articles included a 'drag right.'
- Forced to sell your shares
There are two prices for shares that a Founder is required to sell, depending on whether they've been classified as a 'bad leaver' or a 'good leaver.'
In general, a good leaver is a Founder who has been shown to have been unfairly terminated, had to retire or leave the company due to significant illness, or has died. On the other hand, a bad leaver can indicate any number of things, the price paid for his or her shares can vary dramatically.
The price of good leaver shares is frequently connected to a method that determines their ‘fair worth’.
Bad leaver shares are usually paid at the original shareholder's total value (nominal value plus premium) or the total nominal value of the shares.
The terms aforementioned in the list above are not indicative of every investment term you should be looking for, but it does give you an idea of the types of startup founder protections you might see in investment documentation.
We hope that this blog has given you a better understanding of how you, as a business owner, can safeguard your rights as the company's founder.
If you require assistance with this topic, please contact Persona Finance at [firstname.lastname@example.org] or for other business and accounting queries.