Going from the genesis of an idea of a startup business to actually seeing the company form obviously takes time.
For a start, putting together a pitch deck that is attractive to potential investors isn’t as easy as it sounds, and even if the deck passes muster, investment will only be forthcoming if you do the pitch justice.
It won’t matter what’s written on your slides if you’re not engaging and enthusiastic. After all, if you can’t get excited about your own product, why on earth would anyone else?
The likelihood is you’ll have spent months, maybe even years, working on the project to even get it to the point of wanting to move it to the next level, and invested a decent portion of your own hard-earned cash in so doing.
So, when it comes to the opportunity of moving forward via investment from those who are keen to help you grow your company, you must ensure that you have all of the tools in place beforehand so that you don’t lose any of your rights and control.
Known as ‘founder protection rights,’ in order that you can benefit from the same, rather than being wise after the event when someone else has taken the company from you in plain sight, you can place certain terms within the investment documents.
It’s a relatively simple process and not too time-consuming, when you consider the benefits over not taking the time to dot the i’s and cross the t’s.
You may find a certain reticence from some potential investors to agree to the terms on which you will accept their investment.
What you should be asking yourself at this point, is whether any potential investors will enhance the credibility of your business?
Can you afford to turn them down even if they were they to want to significantly renegotiate the initial investment terms which you put on the table.
There will always have to be some room for negotiation of course, as is standard business practice, though there’s sometimes a very fine line between accepting investment from certain quarters and losing control.
No risks need be taken at this point. If you’re comfortable with the terms that you wish investors to sign up to, proceed on that basis and don’t be bullied.
RIGHT TO BE A DIRECTOR (OR TO APPOINT ONE)
There’s every likelihood that as a Founder, you will also be a Director of your company. If not, the first question you should be asking yourself is why not? Do you really want others to be able to make decisions without your input?
Each Director will have certain responsibilities, decided upon at the outset, and one of which will be the day to day operations. In order to retain control over the same, you will need to ensure that you haven’t sold too many shares, thereby diluting the influence you have.
That Founder’s right, as a Director, also means that you are able to appoint someone of your choosing (or even yourself) to hold certain positions within the company.
In so doing, your influence remains undiminished and allows you to always be fully appraised on matters arising.
SHARES AND LEAVER PROVISIONS
As a startup Founder, you should aim to keep as many shares as is practicable, given that you will, by the consequence of gaining investment in your company, be ensuring that investors are also looked after in this regard.
If your employees have shares, they will normally be required to hand them over at the end of their employment. This specific point should’ve been ratified at the outset in the company’s Articles of Association.
Were you to exit the company for any reason, and provided you’ve been diligent enough, you will not be required to give up your own shares. Certainly not straight away in any event.
If there is provision in the Articles of Association, you can allow some shares to ‘vest’ which means you receive the full rights to them over a set period – which is more often than not established in a shareholders’ agreement or employment contract.
It’s entirely possible that investors will expect you to stay active in the company for a pre-agreed timescale, allowing a certain portion of the shares to vest each year.
It would be a huge surprise if a potential investor didn’t ask for any restrictive covenants to be put in place in the post-investment service agreement.
There’s little benefit to not having them, given that it would allow you as Founder to leave the company – perhaps for a competitor – at any time.
The idea behind restrictive covenants is to safeguard the investment that’s been made, however, importantly it also applies in reverse and ensures that an investor stays on board for an agreed period.
Dependant on the terms agreed, they could also apply for a short while after you’ve left the company.
What’s vital is that you, as Founder, have satisfactory limits in place on the restrictive covenants.
For example, if your service agreement hasn’t taken these into account you could end up being forced to work in locations which could be undesirable. Ditto the business sector in which you would have to work. The length of time you’re unable to work for could also present a problem in the short-term.
As Founder, make sure a short time limit is in place for all aspects – in case a disagreement ends with you being forced out of the business and, effectively unable to work elsewhere, because the restrictive covenants weren’t properly agreed in the first instance.
FORCED TO SELL SHARES
The leaver provisions mentioned above can be often be a complex part of a Founder’s protection rights, but, as with any other, they must be attended to diligently.
There are two prices that are given for shares that a Founder is forced to sell, and these are determined by whether they’ve been classed as a ‘bad leaver’ or a ‘good leaver.’
In general terms, a good leaver will be a Founder who has been proven to have been unfairly dismissed, had to retire or leave the business because of serious illness, or has died.
A bad leaver can denote any other circumstance, and therefore the price paid for his/her shares can vary significantly.
Bad leaver shares will normally be paid at either the total value paid by the original shareholder (nominal value and premium), or the total nominal value of the shares (value into which each share is denominated).
Good leaver shares will almost certainly be linked to a mechanism which ensures a ‘fair value’ is paid. For example, if they were being sold to a third party at what’s known as arm’s length terms (a business deal in which buyers and sellers act independently without one party influencing the other).
A diluted set of shares, for example, because of multiple investment rounds, can affect the ability for you to be able to influence company decisions.
If, as a Founder, you have made sure that your ‘drag right’ is included in the Articles of Association – as long as it is your intention to stay as majority shareholder for a significant period of time post-investment – then you remain in a position to influence the decision making process.
For example, you would be able to ensure that the minority shareholders sell their shares should the company receive a satisfactory purchase offer.
Given that such an offer could be extremely favourable, the opportunity shouldn’t be missed, however, in order to assuage shareholders, it’s important they know that they will be able to get the same price per share as the potential purchaser.
As the majority shareholder, you remain in the position to execute the sale should you so wish. Without a ‘drag right’ as part of the company’s Articles, you would be unable to take this course of action.