It’s not uncommon for your business to attract the interest of an investor, whether it’s a financial fund, an angel investor, or another type of potential partner.
In one such case, the G&P Law team had the privilege of representing a fast-growing software company that successfully completed a second round of funding from an angel investor.
Here’s what’s typical for this type of deal:
- The investor seeks to acquire an equity stake in exchange for a sum of money. Even a small stake is often exchanged for a significant amount—the investment itself.
- The investor usually insists on placing certain restrictions on the company structure to ensure the investment is used as intended.
- Future funding rounds from other sources may come with an obligation to “adjust” the investor’s stake (anti-dilution protection).
If you’re on the business side, here’s what to keep in mind:
- Negotiate clear terms for how the investment will be used. This could include specific purposes like R&D or marketing. It’s unlikely an investor will be willing to finance you if the funds are intended just to repay debt to the tax office or banks.
- Clarify the status of your “product” or service. This often means resolving who holds the intellectual property (IP) rights. An investor won’t fund something that has multiple claimants. Ideally, all IP should be consolidated under one entity—preferably the company itself.
- Retain your key people. Agree on a package for essential employees—the people who drive the product forward. These can be incentivized through instruments like vesting agreements. Investors often take a restrictive approach, tying team members to the company with penalties if they leave early. But this is your team—your goal should be to motivate, not penalize them.
- Plan for future rounds. Subsequent financing rounds may trigger anti-dilution clauses, requiring the issuance of additional shares to the investor to maintain their stake. It’s wise to calculate in advance how much equity you’re willing to give up in exchange for fresh capital, before you lose effective control of the company. The last thing you want is for your business to become entirely subject to someone else’s will.
The above points served as the basis for a productive discussion between the parties in the deal we advised on.
Whether you are looking to attract investors or are an investor yourself, our team of experienced corporate lawyers is here to help. Contact us.
Images: Canva
