Key Points to Remember While Closing Investment Deals
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Over the past several months, the e-commerce industry has witnessed a process of significant evolution. Promoters are interested not only in bringing an investor on board but also in the strategic value the investor brings to the company. At the same time, the strategic investor also looks for ways in which the investment can be integrated into its own growth story. However, such an investment requires attention to detail that goes beyond providing standard investor protections. Take a look at a few key points to focus on such transactions:
1. Promoters are critical to business: The investment documentation should incorporate clauses that spell out the promoters’ obligations to ensure that the value they bring is retained in the company. These clauses could restrict the promoter from starting another business or exiting his/ her employment with the company. The promoters would also be subject to indemnities and other obligations intended to protect the investors. Such obligations could also take the shape of lock-in on the promoters’ shareholding in the company. If any of the promoters choose to separate from the business, it should be ensured that they waive all rights they may have in the company after their exit, if such rights have the potential to interfere with the company’s operations.
2. Retention of key personnel: The company should have watertight employment agreements with all its promoters and key management personnel. A critical aspect of these employment agreements would be detailed provisions in respect of the grant of stock options or other employment benefits, and the claw back of such benefits in the event the terms of the employment agreements are breached or targets not achieved.
3. Pay close attention to commercial terms: Investment documents need to address, in detail, the company’s projections, business plan, and financial strategy, and spell out the specific obligations of the company as well as the promoters in meeting these obligations. Close attention should be paid to the consequences in the event the business plans are not met.
4. Anti-dilution clauses: Often, anti-dilution protections are aggressively negotiated in investment documents. As these clauses can often be tricky, they should be clarified by incorporating an example (non-binding) or a detailed formula in the documents. The other set of provisions that are negotiated are the affirmative vote items. Investors have to tread a fine line between protecting their interests and avoiding interference in the company’s day-to-day affairs. Such clauses need careful drafting, particularly in cases where the investor is a strategic investor, and the investment contains also an element of integration of the businesses of the company and the investor.
5. Don’t forget the ‘typical’ clauses: In instances where the investor and the investee operate in similar or overlapping sectors, ‘typical’ clauses such as those relating to procedural obligations for conducting board meetings, or even boilerplate clauses such as confidentiality, and information/access to investee’s records, require careful review. All parties should also consider the dispute resolution/ arbitration clauses and make sure the mode of dispute resolution is efficient.
6. Final insurance: It is likely that by the time a strategic investor comes on board, the company already has some angel, venture, or early-stage investors on board. Any terms negotiated with the new investor should therefore be acceptable not only to the promoters and the company but also to such existing investors.
(This article was first published in the September 2019 issue of Entrepreneur Magazine. To subscribe, click here)