A: In some ways taking a minority shareholding in a start-up company is no different than for any other company. However, many start-ups have little value and there can often be little disincentive to the founders giving up and moving on. This might mean that the company may not be able to continue and the investment becomes worthless. So, some key points to think about are:
● giving the founders a vesting schedule so that they don’t get all their shares immediately (with English companies this needs to be structured in a particular way)
● a lock-in period during which shares cannot be transferred
● appropriate restrictive covenants preventing the founders from setting up in competition
● ensuring that all the intellectual property is owned by the company and not the founders ● thinking about what other ways the founders can be incentivised to make the company a success
● appropriate investor control by way of a list of reserved matters and possibly the appointment of an investor director
● what should happen in the event of an urgent need for additional fnance to keep the company going
● the next round of funding and how you might be diluted
● obtaining warranties from the founders. Well drafted shareholders’ agreements, investment agreements, articles of association and employment contracts should help protect investors against some of these risks.
Well drafted shareholders’ agreements, investment agreements, articles of association and employment contracts should help protect investors against some of these risks.