When an investor agrees to invest in a young company, it’s often at a critical stage in the development of the business. Money is tight and all time spent on the investment process is time that could have been spent working on the business itself. It’s crucial that any investment is wrapped up as quickly and as cheaply as possible.
At MBM, we’ve led the market for years in the world of early-stage investment deals when it comes to acting on behalf of both founders and investors. That means that we know these challenges well. We think that for many of these companies, there’s a better way.
Any fool can make things bigger and more complex. It takes a lot of courage to move in the opposite direction. - Albert Einstein
We’ve developed a solution for businesses that are looking for small investments (around £100K or less). Below, you can download a free term sheet and free template seed investment agreement with accompanying standard investment terms that cuts through the complexity that’s often found in early-stage deals where companies are often faced with documents more suitable for larger deals.
- Download Seed Investment Heads Of Agreement (Scottish Law)
- Download Seed Investment Heads Of Agreement (English Law)
- Download Seed Investment Agreement (Scottish Law)
- Download Seed Investment Agreement (English Law)
- Download Seed Investment Terms
We’ve built in standard terms that have been accepted in hundreds of deals of this size by both investors and founders over the years. We’ve worked hard to come up with something that is fair to both sides of the deal and doesn’t take sides.
Please note that MBM regularly advise on English deals as well as Scottish deals and we have documents to cater for each jurisdiction.
There is some small print (we are lawyers after all). We still recommend that companies and investors each take independent legal advice. Whilst we’ve worked hard to factor in common situations in seed investment rounds, as you’d expect, MBM can’t assume responsibility for the use of these documents after download. However, we would be really pleased to hear from you if you are looking to appoint a lawyer to help complete your investment and hopefully that lawyer will be us!
Our template seed investment agreement should streamline both the time and cost for both sides but you will still need other documents for an investment deal. We can provide each of these for a fixed fee. These include:
- These documents deal with the formality of issuing shares and comprise standard board minutes, shareholder resolutions, share certificates and filings to Companies House.
- A company’s articles of association are its constitution, which all shareholders are subject to.
- Articles of association deal with matters such as transfer of shares, issue of new shares and appointment of directors. This is the rulebook of what you are allowed to do with the shares!
- £850 plus VAT
- Most investors will want to ensure that the management team they are investing in has appropriate contracts of employment with the Company.
- Such contracts of employment will set out the basics of salary, time commitment, job description and intellectual property ownership.
- They might also contain “restrictive covenants” which would restrict a director from seeking employment with a competitor for a period of time after leaving the company.
- If the investors wish to appoint a director to the Board, it would be typical for that director to sign a letter of appointment as non-executive director which contains similar provisions to those mentioned above for contracts of employment.
£300 plus VAT per agreement
- The MBM Seed Investment Agreement (like most other investment agreements) contains a limited list of warranties that the directors of the company may grant in favour of the investors. If the directors without qualification cannot give those warranties, a disclosure letter may be required.
- A disclosure letter allows the directors of a company receiving the investment to ‘disclose’ to the investors what the true position is with regards the subject matter of a particular warranty.
- A disclosure letter might not always be required. For example, a pure start-up company may have no disclosures to make given the company has yet to commence trading.
- £450 plus VAT
- IP can be generated before the incorporation of the company and before contracts of employment are signed. In the absence of something in the contrary in writing, the creator of the IP will own that IP.
- The general ‘rule of thumb’ is that a contractor owns his IP (not his client) whereas an employer will own the IP of its employees. If a company needs to own the IP of a contractor then, to be legally effective, this must be dealt with in a written assignation of IP (i.e. an IP Sweeper Agreement.)
- Even though you are a director of a company that does not mean that the company automatically owns the IP of that director.
If you would like to hear more about any of the above documents, please click the “Contact Us” section and one of the team will come back to you as quickly as possible. In the meantime, please check out our Helpful Tips for further information about the investment process.
Please also note that if you are a regular investor, we can help tailor our template seed investment agreement, articles of association and heads of agreement for you and provide you with a fixed fee for doing so.
Helpful tips on seed investment deals
To make their investment more tax-efficient, investors may be able to take advantage of the generous tax breaks which are available under either the Enterprise Investment Scheme (“EIS”) or the Seed Enterprise Investment Scheme (“SEIS”). Here are links to HMRC’s website summarizing the EIS and SEIS regimes: http://www.hmrc.gov.uk/eis/index.htm and http://www.hmrc.gov.uk/seedeis
Pre-clearance for EIS/SEIS can be given by HMRC to give reassurance to the investor that his or her investment will qualify. We recommend that any person seeking guidance on EIS or SEIS should speak to a tax adviser with experience in this area.
Always check that your company books are up to date! Every company should have company books which, amongst other things, contain the shareholder registers, often referred to as the “Register of Members”. The Register of Members sets out who the shareholders in the company are and contains precise details of all shareholdings. Until a shareholder is written up in the Register of Members, the shares will not be validly registered in their name. Accordingly, we recommend that you speak to a lawyer prior to the investment taking place so that they may check that the company books (including the Register of Members) are up to date.
The company books should also be crosschecked against the public records at Companies House to ensure consistency. Furthermore, it is worth stating that having a share certificate stating a shareholding is not the definitive indicator as to who holds the shares; what is important is what the Register of Members states. These are akin to the ‘title deeds’ of the Company. MBM Commercial can review your company books and assist with any updates to the Register of Members if required.
We recommend that the company and the investor agree the principle terms of the deal using either what are often called “Term Sheets” or a “Heads of Agreement”. MBM Commercial has prepared template Seed Investment Heads of Agreement which can be downloaded for free through our website. The Seed Investment Heads of Agreement sets out the main parameters of the deal, including what percentage shareholding the investor is to receive for his investment. The Heads of Agreement can help in setting out the framework of the deal before the parties get engaged in more formal investment documentation where they start to incur expense.
The majority of the provisions of the Heads of Agreement are not legally binding, but do carry a certain moral weight once entered into. Some clauses, however, will be legally binding so it is important to bear this in mind. MBM Commercial can advise you should you require any guidance on the Heads of Agreement.
Here is a link to a blog post published by MBM Commercial discussing Heads of Agreement/Term Sheets which sheds some more light on the subject
It is important to agree early in the investment process the percentage stake the investor is to receive in your company in exchange for his investment. Any equity investment made, will have a dilutive effect on the existing members’ shareholdings, so it is best to bottom this out early in the process so that all members know what their shareholding will be post-investment. The easiest way to achieve this is by preparing a share capital table which shows the pre and post-investment share capital position.
Please note that the free MBM Seed Investment Term Sheet deals with these points and we recommend that you use a term sheet like this in all investment deals.
Here is a basic example of how dilution of shareholdings operates:
The investor wishes to acquire 20% of the company for his investment, so post-investment the share capital position will be as follows:
On the basis of the above example, each of the existing shareholders will see their shareholding drop from 25% to 20% by virtue of the investment.
Please also bear in mind that if your company receives additional investment in future, unless something is agreed to the contrary, any new investment will have a further dilutive effect on all the shareholders, including your original investor.
To ensure the investment process runs smoothly and efficiently, it is best for the company and investor to agree at the outset what documentation is to be used. Also, if a set of documents are settled on, try to agree that the documents will not be subject to significant negotiation. The greater a deal is negotiated, the longer the deal will take to conclude and the likelihood is that the investor’s and the company’s legal advisers’ costs might increase.
MBM Commercial has provided the template Seed Investment Agreement and accompanying Standard Seed Investment Terms for seed investments (available to download for free on our website) which aim to streamline the investment process as much as possible. We are happy to provide a fixed fee cost for assisting with any transaction.
If you choose to take legal advice in relation to your investment, we recommend that you appoint a lawyer with experience in this area. Having a lawyer familiar with the process is key to getting the investment done quickly, cost-effectively and with the minimum of fuss. For example, MBM Commercial are specialist legal advisers to investors, entrepreneurs and high growth companies, so don’t come to speak to us about having a will drawn up for your granny! By the same token, not all lawyers will be experienced in investments of this nature, so make sure you choose an appropriate adviser. MBM Commercial has a wealth of experience in this area so would be pleased to assist you with your investment and can provide you with a fixed fee cost for any job.
An investor will most likely want to have an indication of the indebtedness of a company before he invests. Sometimes, the directors of the company might be owed money by the company itself. This may be due to deferment/accrual of fees or salary, or by virtue of the director having loaned money to the company. Most investors would not want any new investment they put in to be immediately used to repay debts owed by the company. Accordingly, the investor might agree that the directors can be repaid over a period of time, or that any debt be converted into equity (i.e. shares) in the company, or, in certain circumstances, that the indebtedness must be written off.
It is important, therefore, for the company and the investor to discuss any such indebtedness at the Heads of Agreement stage so that an approach can be agreed. MBM Commercial has prepared a Seed Investment Heads of Agreement which is available to download for free on our website, and which contains a ‘conditions precedent’ section dealing with indebtedness.
Once the investment is completed, filings need to be made to Companies House notifying them of the new shares issued to the investor. Also, the company books (mentioned above) need to be updated. To ensure this is all done correctly, we recommend that you ask a lawyer to help with this process. It is important that all the company’s share records are properly updated because, for example, if the company goes on to be sold in future, any prospective buyer of your company will check that the shareholding records are correct with you warranting this is the case. If updates or corrective entries need to be made, this can lead to an expense that could have been easily avoided if the paperwork was all dealt with at the time. MBM Commercial will be able to assist with dealing with all relevant filings and register updates post-investment to ensure this doesn’t happen.
If the company plans to go through further investment rounds or ultimately to Exit in future, it is important to maintain meticulous records of all important contracts and agreements. This would include key customer/supplier contracts or licences, leases as well as employment contracts and any other material documents. We recommend that you scan all contracts and name and index them accordingly so they can be easily located if a potential investor/purchaser wants to see this information. Also, please be aware that contracts need to be executed in the correct way according to what legal jurisdiction applies to that contract. If in doubt about the signing requirements of any contracts or agreement we recommend that you speak to a lawyer.