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Start-ups and SMEs: Turning promises into real investments

Sponsored feature | Monty Chamberlain, associate, HCR Hewitsons

Monty Chamberlain, HCR Hewitsons
Monty Chamberlain, HCR Hewitsons

Businesses need investment to create their vision. Pitches and networking often turn into promises of funding from a variety of backers - but converting an initial ‘yes’ into something tangible can be difficult. The essentials include heads of terms, a variety of deal documentation and having the right team by your side.

Heads of terms – setting out the agreement

Heads of terms, also known as heads, are not legally binding, but they do carry moral weight and should not be dismissed out of hand. A good set of heads may ultimately save you money in the long run as they form the basis of more formal contractual documentation. These documents set out the main terms of a commercial agreement between the parties involved and outline the issues relative to a sale, partnership or agreement.

Commercially-astute corporate lawyers will be able to advise you throughout, so you understand the effect of the terms being proposed and that you are happy doing a deal on those terms. They’ll not only provide guidance and understanding, but act as a sounding board if you have any concerns throughout the process.

If you have several offers to choose from, a simple review of the heads provided by each potential investor is key to highlight any differences. This may lead to a more open discussion and can be used to negotiate more favourable terms.

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Deal documents – what to expect

If an investor has reached out and is looking to do a deal, you can expect the following documents:

– Subscription agreement: this is restricted to setting out the terms of the investment and any warranties – promises – about the state of the business. Warranties are given to the investor either by the founder shareholders, the company or both

– Shareholders’ agreement: this is a key governance document which covers information rights, consent matters, undertakings and confidentiality

– Articles of association: this document regulates the internal affairs of a company

– Disclosure letter: used to protect against a breach of warranty claim.

Finding the right investors

You should also remember that finding the right investor is key to unlocking the true potential of your business and helping it grow. This is particularly true in specialist and emerging sectors such as tech and cryptocurrency. Investors can bring fresh expertise and experience to a business which owners - particularly of new businesses - may be missing.

Angel investors invest their own money in a small business for a minority stake and are often entrepreneurs with extensive business experience. Similarly, venture capital is a type of financing which investors give to start-up companies and small businesses who have the potential for rapid growth. In some cases this ‘capital’ is technical or managerial expertise – but is worth just as much as its financial equivalent.

For more information, contact Monty Chamberlain, associate, corporate team on 01223 447418, 0752 5594647 or mchamberlain@hcrlaw.com.

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