Capital Finance - The Investor's Control Requirements
A capital investor in your company may be more or less hands-on, but he will generally want to impose restrictions on your activities to ensure that he has some control over the conduct of the business with a view to safeguarding and optimising his investment.
The early introduction of a shareholders agreement can save a great deal of time and heartache later on. The document itself need not be complicated but should tackle fundamental issues such as allocation of shares, the rights and obligations of each shareholder and what happens if things don't go to plan.
Firstly, there may be restrictions to protect the investor's position as a minority shareholder in your company. Such restrictions may include those relating to the issue of new shares, changes to the Articles of Association or sales of your company's assets.
Secondly, the investor may seek rights to approve important issues which concern the company, e.g. unbudgeted capital expenditure or substantial trading contacts.
Thirdly, an investor may want to appoint a director to your Board whose role would include giving any consent needed in relation to Board resolutions on restricted matters and generally to protect the investors interest. Alternatively, he may be satisfied with the use of a consultant to liaise with your management.
Under the investment documentation, these restrictions may be reduced by stages - often when the mezzanine finance has been repaid. Try to ensure that the mechanisms are workable in practice - they ought not hinder the future operation of your company.