Five key points to think about when going in as a minority investor

POSTED BY Andrew Wallace
14 April 2013

posted in Business | Capital Raising

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Going into business can be an exciting time. However, it's critical at the early stages to give careful thought to various aspects of how the business will work between you and your fellow business partners. This is particularly important if you're going in as a minority investor. While general law provides some comfort, there's a lot that you can and should be doing to actively protect your interests.

There are five key points to think about before handing over your money:

  • What are you getting into? To state the obvious, you need to understand the fundamentals of the business you're investing in, the risks that it faces, and to research the sector in which it operates. Do whatever homework you need to do on the business to get comfortable, and don't be afraid to ask the hard questions of those who're more closely involved. If there's any information in particular that you're relying on, get the others involved in the business to stand behind it.
  • Governance. If you're not going to be a director of the company, you should look at securing appropriate information access rights should you wish to keep a closer eye on things down the track. Another important aspect of this point is making sure that you have a say on major decisions, such as changes in the company's business, changes to the company's constitution, major acquisitions or disposals, any expenditure in excess of agreed limits, taking on debt, transactions between the company and its other shareholders or directors (related party transactions) and liquidating the company. What should happen if, at the board or shareholder level, the parties cannot agree?
  • Anti-dilution protection. You'll want to make sure that if any new investment is going to be taken in, that you at least get the chance to participate in order to maintain your proportionate shareholding. You can also look to protect yourself in cases where shares are issued at a lower value than what you pay for yours.
  • Your return. Is the distribution policy at the board's discretion, or should you be agreeing on a distribution policy up front? Should you be getting a preferential return on your investment? That is, do you get a return first, before other shareholders?
  • Exit arrangements. Should there be an agreement to work towards the sale of the company over a certain timeframe? It's likely that you'll be required to sell your shares if shareholders holding the majority of the shares want to sell theirs. Similarly, you'll want to ensure that you can tag along with the majority if they want to sell their shares, so that you can all exit at the same time.

Ultimately, it's a matter of striking a balance between, on the one hand, giving the majority enough room to move to achieve what they set out to do and, on the other hand, ensuring that your interests are protected. Transparency and trust can go a long way, but in most cases it's preferable to have the difficult discussions up front and record everyone's expectations and agreement on the above points. Time spent thinking about these things before getting going is well worth it considering what can happen when things don't work out as planned.

This article was first published in the Your Law column in the Sunday Star Times on 14 April 2013.

POSTED BY Andrew Wallace
14 April 2013

posted in BusinessCapital Raising

VIEWED 3040 TIMES

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