The annual Engage-Invest-Exploit (EIE) investor showcase is just around the corner and a number of ambitious start-up businesses will be in attendance looking to make valuable connections and potentially attract investment. We at Morton Fraser advise various start-up companies as they seek to grow and expand their businesses and so we thought we would share the top five questions we are most frequently asked by start-ups.
My parents have been really supportive of me and my project, should I give them shares in my company?
We always advise not to hand out shares in your company too easily as investors don't like messy share structures. Remember, when an investor comes along, they'll be looking for shares in your company too which will dilute your shareholding, so you don't want to give too much away to start with and lose control of your company.
It can be difficult when your company is at an early stage and there are limited funds available to pay people for doing things to help you out, but unless it's intended that that person will have a key ongoing role in the business, we'd advise you to hold on to your shares as long as possible or perhaps consider making use of share options instead.
How many shares should I have in my company?
This is a difficult one to answer, but it depends on how many shareholders there are in the company and how much you can afford to put in as capital. If it's just you, it's perfectly possible to have just 1 share in the Company.
A higher number of shares is better when there are more people to divide between but remember that each share needs to be "paid up" at some point. This means that if the company has 1,000 shares of £1.00 each and you're the sole shareholder, then you essentially owe the company £1,000. Resist the temptation of allotting e.g. 1,000,000 shares of £1.00 to yourself - it doesn't make a difference in terms of ownership of the company and unless you can afford to put £1,000,000 in the company's bank account it can make the share capital very unwieldy.
Do I need to have a number of people on the board of directors of my company?
No, it can be just you. It's worth bearing in mind that a director owes various common law and statutory duties to the company however and no one should agree to be a director without considering it seriously. We've written a detailed guide to being a director of a limited company. Contact us if you would like to be sent a copy.
My business partner and I have worked together for years - we won't need a shareholders' agreement, right?
Wrong. We strongly advise anyone setting up a new company with at least one other person to have a shareholders' agreement and properly tailored Articles of Association of the company so as to effectively regulate their business relationship. Examples of things which appear in a typical shareholders' agreement or tailored Articles of Association include:
- Reserved Matters: a list of things which one member can't do without the consent of the other/all members, for example can't spend over £x in any one year, or hire any new staff or staff with a salary greater than £x;
- Share transfers: pre-emption rights ordinarily apply but you might want to make exceptions for transfers to family members of trusts for tax planning purposes. What happens to their shares if a person leaves the Company or if they die?;
- Share allotments: pre-emption rights ordinarily apply, but you might want to make exceptions for share allotments pursuant to exercise of share options which have been previously granted;
- Quorum for Director (Board meetings) and whether the Chairman has a casting vote; and
- Deadlock: this sets out what happens if the members can't agree on a fundamental issue.
It's difficult to imagine at the start of a new venture anything going wrong, but if the worst does happen and if there's no shareholders agreement or tailored Articles in place to regulate problems or disputes it's often a hugely stressful and costly process to resolve matters after the parties have fallen out and this is usually to the detriment of the company.
Someone wants to invest in my company! Happy days! What now?
The first thing we would advise you to do is agree Heads of Terms with the potential investor. This, very broadly, is the "who, what, when and how". It's a non-binding contract which sets out the principles of the investment - who's investing, how much are they investing and what do they want in return (usually a percentage shareholding in your company). In addition to a shareholding in the company, depending on the amount invested, the investor will often look for additional controls - right to information, right to appoint a director and right to be consulted on key decisions are examples.
By sorting out Heads of Terms early on in the investment process you can get an idea of what kind of deal you're getting. It might be the case that the investor is asking for a level of control which is out of proportion to the amount they're putting in, or the investor isn't a good match for the company. Remember, an investor will be part of your company from now on and they need to be a good fit - the wrong investor could be worse than no investor at all. When it comes to selecting your investor the money, they inject is only part of their contribution - you should certainly be looking for them to also bring contacts (a black book), industry insight, "grey hair", expertise and experience.
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