Editors note: “Road To Exit: Start-up’s First Year” is a practical blog series addressing the most common legal questions and problems that a startup company and its management faces during their first year of operation. The series is sponsored by Attorneys at Law Borenius Ltd.
So you have the company up and running and your team is working hard on the service/product. In most cases, you soon start looking for funding beyond the usual friends, family and fools department. Building up an investment ready company affects pretty much everything you do in your company. You build up networks, polish your website and pitch your idea in the social media and various real life events (luckily, plenty of such opportunities are nowadays available). Here are some insights to financing round preparations from the legal perspective.
Get organized and stay organized
Here are some quick (and rather obvious) points that really help your company to be investment ready:
- Even a start up company easily stacks up lot of agreements and other formal documents (such as board meeting minutes or Tekes documentation). Keep track of these documents so they are available when required and better yet, keep an updated index of such documents.
- Get legal advice at least on your most important agreements. This should be rather obvious. Almost every entrepreneur has horror stories of failed agreements.
- Agree at least on the basic rules for the administration of your company (e.g. what are the responsibilities regarding the basic functions, such as filing tax returns). Make sure your general meetings and board meetings are held and recorded as required by law.
- Keep an up-to-date register of shares and shareholders as required by law (amazingly, this is very often neglected!).
- Also, don’t be too creative in your tax planning without solid advice and pay your taxes when due. Arguing with the taxman is NOT something you want in your life!
All investors (with the exception of maybe angel investors) do some level of due diligence (investigation regarding the company and its business) prior to their investment. Don’t get caught unprepared.
Fine line between promotion and offer
Few people realize it, but if your company makes an offer to a large audience (generally over 100 persons) to invest into your company, you are required to publish a formal prospectus which has been approved by the Finnish Financial Supervisory Agency (FIN-FSA). That is basically the case, although the securities markets legislation is very complicated and includes various exceptions to the main rule. The same rules also apply more or less in all of Europe, although e.g. UK has more strict rules regarding the financial promotion to UK citizens.
You can pitch your company as much as you like, but when the offer to invest in your company is explicit and extended to over 100 persons, you should probably check that you comply with the law.
Documenting the investment round
The shareholders agreement is the document that wraps up the terms of the investment and includes the various rights and obligations of the parties to the shareholders agreement. But in an investment process, commitment by the parties builds up gradually.
When discussions with investors get more serious and a request is made to provide detailed information about the company, an NDA (non-disclosure agreement) should be considered. Current market practice is a bit mixed. If you talk to an institutional investor and no top-secret information is provided, an NDA may not be necessary (or the same may be agreed in term sheet). If you are talking to a competitor, industrial investor or angel investor and/or you are sharing truly sensitive data, NDA is well grounded. At least always give it a thought.
Formal discussions begin at the latest when an investor provides a term sheet (or a letter of intent or similar document). The term sheet includes material terms of the investment (valuation, amount of the investment) as well as material terms and conditions of the shareholders agreement that is to be concluded at later stage. Although non-binding (with the exception of non-shop, confidentiality and choice of law provisions), this is a very important document. If you are going to use advisors in connection with the investment, do it here. Getting a careful review or “second opinion” helps the process, because when key issues are addressed and negotiated at this phase, drafting the shareholders agreement is easier.
The eventual shareholders agreement usually includes a lot of auxiliary documents, such as employment agreements or IPR transfer agreements (should these have not been documented in the first place). Although the shareholders agreement is not addressed in more detail in this post, the best advice to be given here is very simple: read and understand what you sign!
About the Author
Antti advises on venture capital, M&A, capital markets and general corporate law related questions. He has wide-ranging experience in advising small and medium-sized companies on numerous M&A and financing arrangements, representing both companies and finance providers. Antti has also worked on numerous capital markets transactions.
Attorneys at law Borenius Ltd is one of the leading law firms in Finland offering a full spectrum of commercial law services. Attorneys at law Borenius’ mission is to be the most hands-on, client-centred business solution provider. The firm’s approach to business challenges is team-oriented, combining its strong and diverse expertise with a thorough business understanding.
Attorneys at law Borenius Ltd is part of the Borenius Group network which consists of approximately 200 lawyers in four jurisdictions in Fenno-Baltic area. The member firms of Borenius Group are independent and separate legal entities practicing advocacy for their own account and following their respective local Bar rules.
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