So far in our series of posts on how to simplify the investment process, we’ve looked at term sheets and what’s involved in due diligence. In today’s post, Kenny Mumford and Claire Corbin focus on the roles and responsibilities of the various individuals involved when an investment is made in a company.
You would think it is as simple as having a company, some founders and an investor right? You might have to live with the fact that there are some pesky professional advisers involved but surely everyone should know what is expected of them?
In many cases this will be true but sometimes the distinctions become a little bit blurred and market practice can see subtle changes which bring with them their own pros and cons.
On the company’s side, there’s always a management team. These individuals may consider themselves founders although further down the line the management team may actually comprise very few of the original founders. Whatever the history, this management team will wear a number of hats – as well as being company directors, they are likely to be shareholders, creators of intellectual property, warrantors, option holders and employees. Individuals might be required to sign different documents in different capacities and it’s important to remember that not all of these will be relevant to the entire team.
It is important to establish a “deal team”. Very often the core management team will also be expected to be the warrantors (effectively the ones that lay themselves open to being sued if the business is not in the shape that they promised) and so they, collectively, will have a key interest in the investment process.
No matter how experienced a management team and investors are, or how streamlined the process is, it can still be a time-consuming business. Most management teams will want to avoid duplication of effort and give one or two of their colleagues lead responsibility for progressing the legal documentation and the disclosure exercise (see our forthcoming post on Disclosure).
In more mature companies, it’s often the Finance Director who finds himself charged with running the process, under the oversight of the Chief Executive. But no matter who is performing the lead role, it’s crucial that all warrantors are given adequate opportunity to feed into the disclosure process. A good adviser will help ensure that this takes place.
Before drafting legal documents and starting the process of disclosure, the company will probably have been through a diligence exercise. The management team should allocate lead responsibilities for diligence and disclosure, as the inevitable overlap between diligence and disclosure means that it is essential that at least one of the deal team is involved in both aspects and understands what documentation has been shared and where copies have been retained.
On the investor side, the lead roles and responsibilities will be dictated by the nature of the investors. A well established Business Angel syndicate may have a gatekeeper or investment manager who is the main point of contact. If so, he or she will run the investment process from start to finish, with the assistance of syndicate members, advisers and others, as appropriate.
A less formalised network of angel investors may rely on a lead angel or angels coming forward to negotiate the specific terms of the deal.
On the other hand, professional investment firms will have investment managers that have core responsibility for running the investment process, subject to investor committee approvals.
Once you’ve identified the basic teams, good project management becomes invaluable, with some investors setting out timetables to completion together with detailed allocations of responsibilities. In other investments, things may be left to take their natural course. However, it’s always important to ensure that at each stage there is a clear understanding of who has responsibility for any particular action.
Of course we couldn’t let this blog go without highlighting the importance of good legal advisers.
Identifying legal and indeed financial advisers, who have extensive experience in the kind of deal that you are involved in can dramatically reduce the timelines and frustrations involved. Advisers familiar with the process can anticipate any potential hurdles and can also help you pick the battles which are worth fighting.
Investors traditionally produce the investment documents that they are prepared to sign up to. Indeed, sophisticated investors may have a stock of legal documents that they offer for early stage investee companies to help reduce legal costs whilst at the same time achieving consistency across their portfolio. This might include IP transfer agreements, employment agreements, share option schemes and other documentation that is commonly used by early stage companies.
More recently however we have seen an increase in a less conventional approach, where investors have asked companies to produce proposed documentation. It is not always clear why an investor would want to take that approach but for it to work, any investor does need to remain true to the spirit of that negotiation and be willing to adopt a proposed form of documentation and amendments would need to be restricted to glaring omissions. The increased availability of relatively freely available template documents, from UK Business Angel Association, LINC Scotland, Y Combinator and the like is however immensely helpful in giving advisers and their clients an agreed starting point from which to work.
If you have completed an investment recently, would you structure your team differently for the next round? Have you as the company been asked to provide the deal documents to investors? If so, what do you think were the pros and cons of doing so? We’d be interested to hear from you in the comments below.