How Private Investments are Structured

June 25, 2017

There are several ways in which a private investor may choose to invest in your business.

Ordinary Shares

The most common approach is through ordinary shares. You agree to a fixed cash investment from the investor and the number of shares that the investor receives in return. As a holder of ordinary shares, the investor is entitled to dividends and has the right to vote on company matters.

You will need the following legal documents when raising money through ordinary shares:

Term Sheet (Ordinary Shares)

This document is a statement of the proposed terms and conditions in connection with the investment. This document is usually prepared by the investor.

Seed Investment Agreement (Ordinary Shares)

This document sets out how a business will sell ordinary shares to investors and usually incorporates the terms agreed upon in the Term Sheet (Ordinary Shares). The agreement records the parties’ rights and obligations in the shares and the share allotment process.

Share Certificate

A new investor will need a Share Certificate as evidence of his or her shareholding in the company.

Preferred Shares

In a later stage of the business, an investor might want to choose to invest through preferred shares, which grant additional rights to the investor. This is more common in later series financing once the business has a predictable revenue stream. Typically, the invested amount is much larger.

Convertible Note

A convertible note is a short-term loan that converts into equity. Investors loan money to a company, and, rather than receiving their money back with interest, they receive shares in the company’s next round of funding, normally at a discount to the price paid by other investors in that round (typically around 15- 20% less). In short, these are debt instruments backed by the equity of the company.

You will need the following legal documents when raising money through a convertible note:

Convertible Note Term Sheet

This document is similar to a Term Sheet (Ordinary Shares) in setting out the terms and conditions of the investment, but, in this case, it is for an investment through a convertible note detailing how and when the loan will convert into equity.

Convertible Note Subscription Agreement

This document details the terms of the loan provided by the investor, including the provisions for the loan to be converted into equity.

Convertible Note Certificate

A new investor will need a Convertible Note Certificate as evidence of his or her shareholding in the company.

Simple Agreement for Future Equity (SAFE)

A private investor can invest in your company using a SAFE Agreement. It is a relatively new concept and is very similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company, and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding. In this case, use a SAFE Agreement.

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  • Other Documents you need when Raising Capital

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Hiring Staff

Make an Offer

Once you have selected the right candidate for the position you intend to hire, an Offer of Employment Letter is used to indicate a conditional offer. This document sets out the conditions which the candidate has to fulfil in order for the offer to be valid.

Use the Correct Employment Document for Your New Hire

Different circumstances require different documents. Make sure you use the most suitable document for your new hire.

By signing the Employment Contract, the new hire accepts the offer. A written Employment Contract reminds both employer and employee of their obligations, helps avoid possible disputes, and clearly sets out the rights of both parties.

If you are hiring a junior employee, a junior Employment Contract will be most suitable. It sets out key information about the employee’s work, including important areas such as probation period, pay, benefits, hours, holiday, sickness, termination, and confidentiality.

A senior employee will have more responsibility and will most likely have access to more confidential information. The law sets out different obligations for employers hiring senior employees. In these circumstances, a senior Employment Contract will be required. This also deals with intellectual property, bonuses, and post-termination restrictions.

Hiring an independent contractor, consultant, or freelancer can help you get specific expertise on board for a short period of time. In this case you should enter into a Consultancy Agreement. In particular, this ensures you protect the intellectual property of your company by making sure anything created by the consultant belongs to your business.

Hiring interns might be an easy way to access extra resources. As a startup or growing company, you have a tight budget. You only have a few employees but need a lot to get done. Use a Letter Offering Internship to set out the terms of the internship and protect the confidentiality of your business.

When you appoint a director, you might need a Director’s Service Agreement. A director has certain rights and obligations as an employee and additional rights or obligations that arise as a director of the company. A Director’s Service Agreement lays out key information about the director’s work. It gives the company and the director contractual responsibilities and allows either side to take legal action if the other side breaches the agreement. It also deals with what happens if he or she resigns from their legal role as director of the company.

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Ending a Business Relationship

When you want to terminate a contract, make sure you do this in writing using a Letter Ending a Contract so there is a clear written record of the termination of the contract.

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Dismissing Employees

If an employee is not meeting expectations or completing a corrective action plan, do not be afraid to terminate the employee’s employment. If your performance evaluations have been done properly, it can be a constructive parting for both you and the employee. Make sure you follow the correct procedure.

If the contract specifies a notice period, you must either serve the notice or pay salary in lieu. If you want to terminate the Employment Contract, you must give notice to the employee in writing in the form of a Notice of Termination by Employer.

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Legal Documents Every Business Should Have

Documents play an essential role in protecting the interests of a business and the business owners over the course of a company’s lifetime. Tackling your legal needs can seem like a daunting task, but it doesn’t have to be. It’s often wiser to start protecting your business at the very start and not leave it until it’s too late. There are a number of key legal documents that are essential for business success.

Confidentiality Agreement

In the excitement of setting up a business, it’s natural to want to share your ideas with family and friends. But remember, once an idea is out there, it can’t be drawn back in. If you are working with potential business partners and will share your business ideas with them, ask them to sign a Confidentiality Agreement (also known as a Non-disclosure Agreement or NDA), under which they are legally bound not to disclose your confidential information to a third party, and may only use that information for a specified reason.

Shareholders’ Agreement or Partnership Agreement

A Shareholders’ Agreement is an agreement between the shareholders of a company and sets out a number of key rules as to how the business will be run, ensuring that the shareholders cooperate and there is continuity throughout the life of the company. This document should cover who the shareholders are, their rights and responsibilities, and what will happen if and when they decide to leave the company. If you operate under a business partnership, make sure you have a Partnership Agreement in place that sets out how decisions are made and profits (and liabilities) are shared.

Employment Contract

An employment relationship should be documented right from the outset. An Employment Contract sets out the obligations and expectations of both the company and the employee in order to minimise potential disputes. An Employment Contract should cover key areas such as probation period, pay, benefits, hours, annual leave, and termination.

Website Privacy Policy and Website Terms of Use

As e-commerce has grown, legislation that governs online business has become stricter. Website providers should clarify how personal data (e.g. name, contact details) provided by users will be used by using a Website Privacy Policy. By clarifying the scope of personal data usage and protection, website providers can comply with legal or regulatory requirements connected with data collection and avoid future disputes concerning data privacy infringement. A Website Terms of Use sets out the legal relationship between the website operator and users and ensures that users agree to your terms when using your website. Users often agree to website terms by ticking a box or are bound by the terms simply by using the website.

These two documents are key even if you are not selling goods or services online.

Purchase Order, Invoice, and First Payment Reminder Letter

Good cash flow is essential for a healthy business. Clearly set out payment terms in a Purchase Order when you start to engage customers. Issue Invoices on time and keep track of all payment related documents as these will be critical when chasing up debts. Make sure you understand how to deal with late payments and follow the right procedures to collect your money. If a customer is late in paying your invoice, send a formal First Payment Reminder Letter. It can prompt a customer to pay the overdue invoice so you stay on top of your cash flow.

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