The important documents to consider when dealing with investors for your SME
Jun 24, 2021At Navistar Legal, we want to empower small business owners to feel confident when exploring the world of investment. When it works well, it’s a boost for your business, but like any major strategic business decision, there are pitfalls to avoid.
So we have put together this three-part blog series to answer any questions you might have around investment for your SME, from the key issues to be aware of to maintaining control of your business to what you need to get in writing.
In part three, we are going to look how at the important documents to consider when dealing with investors for your SME.
Why do I need to put anything into writing?
In an ideal world, your business would have every agreement in writing signed by all parties, stored appropriately and updated upon renewal. But, in the world of small business when you are having to deal with so much with little resource, there may be a few loose ends.
An agreement doesn’t have to be in writing to be legally binding, but getting something on paper is a simple way to avoid issues in the long run. Putting the terms of an agreement into writing gives you a greater level of clarity and understanding. It gives everyone a basis to work from, the opportunity to discover any gaps in your understanding, ask questions and discuss the “what ifs?” It reduces the likelihood of disputes, broken promises and severed relationships. It also acts as a record of what was agreed and acts as evidence should disputes arise.
So what are the essential documents you will need when considering investment for your SME?
NDA
Before you provide any details about the company, you will want to protect yourself against any unauthorized disclosure of your company trade secrets with a non-disclosure agreement.
Investors must be obligated to keep the information that you are providing to them confidential, especially if they are investors that have invested in similar companies, it is imperitive that your plans are not shared or used to improve your competition.
Subscription Agreement
Subscription agreements are usually for larger investments, but they can be useful to get people to sign on the dotted line and as well to show other investors that other people have agreed to invest. It is lower risk to an investor, since if you do not raise the initial investor, the agreement falls away.
Shareholders’ Agreement and Articles of Association
A shareholders’ agreement can be made at any time during the lifetime of a company, but is usually made when a new company is set up. As a shareholder, even if you don’t have a shareholders’ agreement, you are still bound by the articles of association.
A company’s articles of association set out the basic rules, processes and procedure for your company. Like most businesses, you may never have your articles of association and they are often forgotten. That is not a problem when you own 100% of the business or are the sole director. But if that changes you want to ensure that they reflect accordingly.
There are some differences between having a shareholders’ agreement and articles of association.
Articles are a public document, open to public inspection at the Companies Registry. So if you want to keep certain things secret, you will want it in a shareholders’ agreement which is a private contract.
The articles can be altered at any time by special resolution of the members, ie 75% of the votes of those present at a general meeting. A shareholders’ agreement cannot be amended except with 100% of the people who have agreed to that contract.
If you have a shareholders’ agreement you will want to make sure that the same terms are reflected in the articles as well.
Director’s Agreements
If you are bringing other directors on board ensure that they are aware of their director’s duties. Each of these can be put into a director’s service agreement. If a new investor is coming on board, think about any director’s agreement that they want put in place because it may impose additional obligations on you.
Minutes and Resolutions for Shareholder and Board Meetings
Board minutes and resolutions are important documents that demonstrate that the current directors or shareholders have approved certain decisions. When shares are being issued, or shares are being transferred the board or shareholders may have the right to make these decisions.
Once any agreement is signed, make sure that it is stored somewhere easy to access. Records are important and often overlooked in the creative and chaotic entrepreneurial space. Although creating a system for organising your documents requires some initial thought and effort, it doesn’t need to be costly and it is worth the effort.
Good luck with investing to grow your business! At NaviStar Legal, we understand how important this step is for your business and are always on hand to guide you through the investment process. Contact us.
