Someone wants to invest in my agency: what should I agree before taking their money?

Someone offering to invest in your agency can feel like a fairly simple deal: they put money into the company and receive shares in return.

In practice, the percentage they receive is only one part of the conversation.

Before taking the money, you need to understand what rights the investor will have, what decisions you’ll still be able to make without them and what happens when either of you eventually wants to exit.

Those points can matter long after the investment money has been spent.

Here are the main things I’d want an agency founder to agree before accepting an investment.

Agree how much the business is worth and what the investor is getting

Start with the basic numbers.

How much is the investor putting in? What valuation are you placing on the agency? What percentage of the company will they own after the investment?

Be clear whether the agreed valuation is a pre-money valuation, meaning the value before the new investment is added, or a post-money valuation, meaning the value after the investment.

You should also consider whether the investor is subscribing for new shares, with their money going into the company, or buying existing shares from a founder, with the purchase price going to that shareholder.

Those are commercially very different transactions.

Make sure everyone is working from the same numbers before moving on to the detailed legal documents.

Decide what type of shares the investor will receive

Not all shares necessarily carry the same rights.

An investor might receive the same ordinary shares as the founders, or the parties might agree a separate class of shares with different rights.

Those rights could affect voting, dividends, the return of capital and what happens if the agency is eventually sold.

This is where focusing solely on the percentage can be misleading. An investor owning 20% of the shares doesn’t necessarily have exactly 20% of every economic or voting right if different share classes exist.

The company’s articles of association will usually contain the detailed rights attaching to each class, so these need to match the commercial deal you’ve agreed.

Be clear about which decisions need the investor’s approval

One of the biggest changes after taking investment can be that you no longer have complete freedom to make certain decisions.

An investor may ask for a list of matters that cannot be undertaken without their consent.

These might include issuing more shares, taking on significant borrowing, changing the nature of the business, making a large acquisition, selling important assets or changing the rights attached to shares.

Some investor protections are perfectly reasonable. The question is whether they are proportionate to the investment.

If you’ve built an agency that needs to make decisions quickly, you don’t want to discover afterwards that routine commercial decisions now require investor approval.

Agree where the boundaries sit before the money comes in.

Decide whether the investor gets a seat at the table

Will the investor become a director? Will they have the right to appoint somebody to the board? Or will they simply be a shareholder?

These are different roles.

Directors are responsible for the management of the company and owe legal duties in that capacity. A shareholder, by contrast, owns shares and exercises the rights attached to them.

An investor who isn’t joining the board may still ask for regular financial or management information.

Think about what level of involvement you actually want. An experienced investor who understands agencies may bring valuable contacts, expertise and challenge. Equally, you need clarity over who is running the business day to day.

Agree what happens if you need more investment later

Today’s investment might not be the last money your agency raises.

Consider what happens if you issue more shares in the future.

Existing shareholders may have pre-emption rights, which broadly give them an opportunity to participate in a new share issue before shares are offered elsewhere. This can allow an investor to protect their percentage ownership by investing further.

You should also understand dilution.

If new shares are issued and an existing shareholder doesn’tparticipate, the percentage of the company they own may reduce.

The important thing is that founders and investors understand how future fundraising will work rather than dealing with it for the first time when the agency urgently needs additional capital.

Talk about exit before anyone is thinking about leaving

Discussing exit arrangements at the beginning can feel premature. It’s also one of the best times to do it.

What happens if you receive an offer to buy the agency in three years?

A buyer may want to acquire 100% of the company. Your shareholders’ agreement and articles can contain provisions dealing with this.

A drag-along right can, subject to its terms, allow the required majority of shareholders to require the remaining shareholders to sell as part of a company sale.

A tag-along right can allow minority shareholders to participate where other shareholders are selling, so they aren’t simply left behind with a new majority owner.

You should also think about what happens if the investor wants to sell their shares when you don’t.

Agreeing these rules while everyone is excited about working together is usually easier than negotiating them when somebody wants out.

Consider what happens to the founders’ shares if they leave

An investor may want protection against a founder taking their investment and leaving the business shortly afterwards.

That can lead to provisions dealing with what happens to a founder’s shares if they stop working for the company, often described as leaver provisions.

These need careful attention.

The price a departing founder receives for their shares can sometimes depend on why they are leaving and how the relevant provisions are drafted.

For a founder who has spent years building an agency before the investment arrives, that distinction matters. Make sure you understand the circumstances in which you could be required to sell shares and how the price would be calculated.

Put the deal into the right documents

Once you’ve agreed the commercial position, the documents need to reflect it properly.

Depending on the investment, these might include an investment or subscription agreement, shareholders’ agreement, new articles of association and the necessary shareholder and board approvals.

There will usually also be Companies House filings and updates to the company’s statutory records following the share issue.

The shareholders’ agreement and articles are particularly important because they govern the relationship after the investment has completed.

Don’t treat them as paperwork to tidy up after the money arrives.

What should you agree before accepting an investment?

Before taking an investor’s money, I’d want an agency founder to be able to answer these questions:

·      How much are they investing and what percentage will they own?

·      What shares and rights will they receive?

·      Which decisions will require their approval?

·      Will they have a board seat or other involvement in management?

·      What happens if the company raises more money?

·      What happens if a founder or investor wants to leave?

·      What happens if somebody wants to buy the agency?

An investment should give the business something valuable, whether that’s capital to grow, expertise, contacts or a combination of all three.

But you’re also changing the ownership of a company you’ve built.

Spend as much time agreeing the relationship you’re creating as you do negotiating the amount of money coming in.

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Frequently asked questions

Do I need a shareholders’ agreement when someone invests in my agency?

It’s usually sensible to consider one. A shareholders’ agreement can document how important decisions are made, what information shareholders receive, how shares can be transferred and what happens if somebody wants to leave or the company is sold.

Can an investor own shares without becoming a director?

Yes. Being a shareholder and being a director are different things. An investor can own shares without joining the board, although they may negotiate rights to receive information or approve certain important decisions.

Will taking investment reduce my percentage ownership?

Usually, if the company issues new shares to an investor and you don’t receive additional shares yourself, your percentage ownership will reduce. The exact effect depends on the company’s existing share capital and the number and rights of the new shares.

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This article is for general information purposes only and is not advice on your specific situation, and does not constitute legal advice.

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