Investment – Cash and “Sweat Equity”

January 2016

Many companies from startup ventures to those at a more mature stage of development may require investment at some stage. This may be to fund a particular project or simply to allow the company to grow at a faster rate than it otherwise would. Companies can and do also borrow money from family and friends or from a bank via a formal loan, however as an alternative to borrowing, an investment directly into a company, particularly for a start-up with little track record, is an increasingly popular route to grow a business.

The form an investment takes can vary. The most usual form of investment is a cash investment into the company in return for an equity (share) stake in the business.

However, particularly for start-ups, a company may need to bring someone into the business in order to provide a particular skill or expertise but the business may not be in a position to provide that person with their usual cash fee. One way around this is to offer that person the opportunity to “invest” in the company in return for the provision of the particular service. This is often known as a “sweat equity” arrangement. Shares are awarded to the “investor” in consideration of their time, knowledge and skill contributed. Unlike financial equity, whereby the participant or investor pays for the shares in cash, this arrangement reflects the person’s human contribution to the company – the value of which will need to be agreed by the parties concerned.

To cover both these investment scenarios we have added a new subfolder – Share Investment Agreements - to our shareholder group of documents, the new material includes:

·         A Share Investment Agreement – the classic investment agreement, where an investor injects cash into a business in return for a share stake;

·         A Share Investment Agreement (Shares for Services) – an alternative investment arrangement as referred to above, where shares are awarded in consideration for the “investor’s” time, knowledge and skill contributed to the business;

·         Board minutes to accompany both investment agreements, approving the company entering into these arrangement; and

·         Shareholder resolutions to accompany both investment agreements, authorising the issue and allotment of shares to the investor.

 

These new templates will be of interest to all directors and shareholders of small private companies as well as to potential investors.

We will be adding further investment templates to our Corporate folder of documents in due course.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.

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