Introduction
For many business owners, bringing on investors can be an exciting step. Investors can bring the capital needed to grow, expand into new markets, hire employees or develop new products or services.
However, accepting investment is not just about receiving funds and it can often involve giving investors an ownership interest in the business and creating long-term relationships that can impact how your business is managed and operated.
Before you accept any investment, it is important that you understand the legal implications involved and ensure that your business is prepared. This article explores the key legal considerations when bringing on investors.
Key article takeaways
- Bringing on investors can provide capital for growth, but it may also affect ownership, control and decision-making.
- Before accepting investment, business owners should understand what rights the investor will receive and whether their goals align with the business.
- A shareholders agreement can help document voting rights, transfer restrictions, exit rules, dispute processes and future investment arrangements.
- Businesses should protect confidential information and intellectual property before sharing sensitive details with potential investors.
- LawBase can help business owners prepare the legal documents needed before accepting investment, including shareholders agreements, subscription agreements and confidentiality agreements.
What does the investment mean?
One of the first decisions to make is understanding the type of investment you are accepting and what rights the investor will receive.
When providing capital, investors may receive shares or an ownership interest in the business, which can give them certain rights including voting rights, access to information and the ability to participate in key business decisions.
Before agreeing to accept any investment, you should consider:
- What stake of ownership are you willing to give away?;
- What control or decision-making rights will the investor have?;
- Whether the investor’s interests align with the future goals of the business; and
- What happens if there is a disagreement between the founders/owners and investors?
It is important that you understand not only the immediate benefit of receiving capital from an investor but also the long-term impact of bringing another party into the business.
Review company structure
Before taking on investors, it is important that your business structure is suitable for investment.
For example, investors generally expect to invest in a company rather than a sole trader or a partnership. If your business is not structured appropriately, you may need to consider restructuring the business before seeking or accepting investment.
Reviewing this also provides you with the opportunity to assess whether your existing ownership arrangements are clear and whether appropriate agreements are in place.
Put a shareholders agreement in place
For companies, a shareholders agreement is one of the most important documents, especially when bringing on investors.
While a company may have a constitution, this only sets out certain rules for how the company operates, whereas a shareholders agreement provides a framework for managing the relationship between various shareholders.
A well-drafted shareholders agreement can address important issues including:
- The rights and obligations of shareholders;
- Decision-making processes;
- Restrictions on transferring shares;
- What happens if a shareholder wants to exit the business;
- Dispute resolution processes; and
- How future investment rounds will be managed.
Having these issues addressed early on can help prevent disputes and provide clarity as the business grows.
LawBase can assist with preparing a shareholders agreement. LawBase specifically offers a shareholders agreement legal package to assist business owners which can be found here.
Complete due diligence
Investors will often undertake due diligence before committing funds to a business.
This process enables them to assess the business, identify any risks and understand what they are investing in and how their funds will be used.
Business owners should also conduct their own due diligence on the investor. This review should include considering whether the investor is the right fit for the business and whether their values, expectations and goals align with the business.
It is important to remember that bringing on an investor is the start of a business relationship, not just a financial transaction.
Download our free due diligence checklist.
Protect your intellectual property and confidential information
Before you share sensitive business information with a potential investor, you should consider how that information will be protected.
While it is not unusual to share confidential information during investment discussions, a confidentiality agreement or non-disclosure agreement should be put in place to help protect sensitive information and ensure there are clear obligations around how information can be used.
Get the legal documents right
Proceeding with an investment transaction requires careful documentation to ensure everyone understands the terms of the arrangement.
Depending on the circumstances and matters agreed to, the documents may include:
- Investment agreements;
- Subscription agreements;
- Shareholders agreements;
- Amendments to company constitutions; and
- Other corporate documents.
While it can be tempting to move quickly when the opportunity for investment arises, failing to document this arrangement properly can create significant problems in the future.
Conclusion
Bringing on investors can be an important milestone for businesses as they grow, but it must be approached carefully. While the right investor can provide capital, experience and connections, an investor who is not the right fit can create disputes and limit your ability to run the business the way you intended.
Before accepting any investment, you should take the time to understand the legal implications involved, protect your interests and ensure your business is ready for growth.
Additional resources
Frequently asked questions
Before bringing on investors, you should consider how much ownership you are willing to give away, what rights the investor will receive, how decisions will be made, whether the investor’s goals align with the business, and what happens if there is a disagreement later.
You should also review your company structure, existing ownership arrangements, shareholders agreement, intellectual property ownership and confidentiality protections before sharing sensitive information or accepting funds.
Getting legal advice early can help ensure the investment is properly documented and that your business is protected before the investor becomes involved.
Schedule a Free CallIf you are bringing an investor into a company, a shareholders agreement is strongly recommended.
A shareholders agreement can set out the rights and obligations of shareholders, decision-making rules, transfer restrictions, dispute resolution processes, exit arrangements and how future investment rounds will be managed.
Without a shareholders agreement, business owners may be left relying on the company constitution, legislation and negotiation if a dispute arises.
LawBase can help prepare a shareholders agreement that gives founders, shareholders and investors greater clarity from the outset.
Investor rights will depend on the terms of the investment and the documents agreed between the parties.
An investor may receive shares, voting rights, information rights, dividend rights, rights to participate in major decisions, rights to appoint a director or observer, pre-emptive rights, or rights to participate in future investment rounds.
These rights can significantly affect control of the business, so they should be carefully considered and properly documented before investment is accepted.
Yes. While investors often conduct due diligence on a business, business owners should also consider whether the investor is the right fit.
This may involve considering the investor’s experience, expectations, values, commercial objectives, time horizon, reputation and level of involvement in the business.
Bringing on an investor is not just a financial transaction. It creates an ongoing business relationship that may influence how the company is managed and grown.
Before sharing sensitive business information with a potential investor, you should consider using a confidentiality agreement or non-disclosure agreement.
This can help clarify what information is confidential, how it can be used, who it can be shared with, and what happens if the information is misused.
This is particularly important if you are sharing financial information, customer lists, business plans, pricing, trade secrets, intellectual property, product ideas or other commercially sensitive information.
The documents required will depend on the structure of the investment and the terms agreed between the parties.
Common documents may include a shareholders agreement, subscription agreement, investment agreement, confidentiality agreement, amendments to the company constitution, director or shareholder resolutions, share certificates and ASIC-related company records.
Having the correct documents in place helps ensure the investment is properly recorded and reduces the risk of confusion or disputes later.
Yes. Bringing on investors can affect control of your business, especially if the investor receives voting rights, veto rights, board appointment rights or rights to approve major decisions.
Even a minority investor may have significant influence if the investment documents give them special rights.
Before accepting investment, business owners should understand not only how much money is being invested, but what control, approval and decision-making rights are being granted in return.
Yes. LawBase can help business owners understand the legal implications of bringing on investors and prepare the documents needed to protect the business.
Depending on your circumstances, this may include a shareholders agreement, subscription agreement, confidentiality agreement or other investment-related documents.
For simpler founder-led arrangements, LawBase’s fixed fee Shareholders Agreement Package may be suitable. For more complex investor-led transactions, LawBase can provide tailored advice based on your business, investor terms and growth plans.
The information in this article is for general purposes only and you should obtain professional advice relevant to your specific circumstances.
Prepare Your Business Before Bringing On Investors
LawBase helps Australian business owners prepare the legal documents needed before accepting investment, including shareholders agreements, subscription agreements and confidentiality agreements.
Whether you are bringing on your first investor, restructuring ownership or preparing for future growth, our team can help you understand the legal implications and protect your business from the outset.
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