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Running a business is no easy feat that you can do on your own. Indeed, there comes a time in your business’ life when taking on investors can be extremely beneficial. If you are considering bringing on investors for your business, or perhaps you already have, you may be wondering how to manage these investors. Likewise, it is not always clear what your rights and responsibilities may be. This article will outline the different types of investors, how to govern the relationship between your company and its investors, and what rights investors may have. 

Business Investors

Investors are individuals or entities that provide you with capital in return for an ownership interest in the company. Indeed, they can be a great asset when your business is in an ideal growth stage as they can financially support your business values and goals. 

Different Types of Investors

The type of investors that you have or should seek to find will depend on the size of the investment. Importantly, it will also depend where your startup is currently sitting in it’s business growth cycle. Indeed, you will either have active or passive investors, or a combination of the two. This will depend on whether they are involved in the day-to-day business decisions of the company.

The different types of investors can include:

  • friends and family;
  • angel investors;
  • micro-VC;
  • institutional VC; and
  • corporate VC / investors.

For example, Sam is raising capital for his new tech startup, developing a mobile application. Sam’s brother, Peter, is also in the tech space and decides he would like to invest in Sam’s business. Peter negotiates with Sam to amend the shareholder agreement to give him veto rights on certain critical decisions of the business. In this case, Peter would be considered an active investor. 

Different Types of Investments

Investments can be broadly classified into one of the following three categories.  

Type of investment

Explanation

Equity

Your investors provide you with capital in return for a certain percentage of ownership in the company in the form of shares. Alternatively, your investors gain a contractual right to future equity by entering into a SAFE. A SAFE note will convert into equity on a trigger event.

Debt

You receive a loan from a bank or other institutional investors. 

Hybrid

You issue a convertible note that will convert to equity on a trigger event.

Relationship Between the Company and Investors

You may already be familiar with the shareholders agreement if you have brought on investors. The shareholders agreement sets out the relationship between your investors, founders and the company. Each investor must agree to enter the shareholders agreement before being issued shares. Therefore, you will typically see more sophisticated investors negotiating the terms of the shareholders agreement. 

Ultimately, a shareholders agreement will set out: 

  • how shareholders govern their relationship and business arrangements;
  • details of shareholders’ rights, responsibilities, obligations and liabilities; and
  • how shareholders can protect their interests, with regard to their particular circumstances.

Typically, shareholder agreement provisions will include: 

  • the process of issuing new shares;
  • the process of selling existing shares;
  • directors’ duties;
  • conduct of board and shareholders meetings; and
  • a dispute resolution process.

Including Investors In Company Decisions

The shareholders agreement may also set out certain decisions that investors will have veto rights over. For example, this can include: 

  • materially changing the nature of the business’ operations;
  • changing the company constitution; and
  • selling or licencing a significant portion of the company’s intellectual property rights.

Managing Shareholder Disputes 

It might be the case that an investor is also a shareholder of your company. Therefore, it is important to know how to manage shareholder disputes. Indeed, the shareholders agreement will usually include a dispute resolution clause, detailing the correct process for handling disputes. For example, if you are experiencing a dispute with a minority shareholder, you may consider meeting with a third party mediator.

Investors From the General Public

It is also possible to raise funds and bring on investors from the general public, otherwise known as ‘retail investors’. In that case, you may want to consider conducting an equity crowdfunding campaign through a third party intermediary. However, it is important to ensure that this intermediary holds the appropriate Australian financial services licence. 

If you want to understand more about how to raise capital or the general matters you should be aware of as a startup, we recommend reading our Startup Manual.

If you do decide to bring on crowdsourced funding investors, you will most likely not have a shareholders agreement. This is because any changes to the shareholders agreement, or decisions requiring unanimous approval of shareholders, will require agreement from all shareholders. Indeed, this can be particularly unwieldy when a company has a large number of small investors sourced through crowd funding. This means your shareholders agreement is typically terminated when preparing for a crowdsourced funding campaign. Therefore, it is more practical to instead update your constitution to include many provisions around shareholder rights that you would typically find in a shareholders agreement. 

For example, a crowdsourced funding appropriate constitution will include provisions such as pre-emptive rights around share issues, drag and tag provisions. These terms are not found in a standard constitution.

Key Takeaways

You will have different types of investments and investors depending on your company’s size and stage of life. Indeed, a shareholder agreement will help govern the relationship between your company and its investors. Furthermore, this document will detail how your company will involve shareholders in key decisions, and overall, how you best manage your business investors. 

If you require assistance in bringing on investors or managing existing investors, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

Is an investor the same as a shareholder?

Investors are individuals or entities that provide you with capital in return for an ownership interest in the company. Indeed, an investor can sometimes also be a shareholder. However, they may not necessarily have the same voting rights as a shareholder. This is because a shareholder is a person who owns stock or shares in a company. 

How can I best manage my business investors?

You can seek to govern the relationship between your company and its investors through a shareholders agreement. Importantly, the shareholders agreement sets out the relationship between your investors, founders and the company. Furthermore, it will also include details of shareholders’ rights and responsibilities. For example, it will include a dispute resolution process.

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