While an idea may be the genesis of an entrepreneurial venture, it’s the economic viability that defines its success. Drawing an analogy from the above statement, it is fair to state that while starting up a venture may be convenient to achieve, expansion of the business requires certain funding requirements apart from the initial seed capital. One of the common methods of infusing additional capital into the business is seeking external third party’s investment through private placement. Being less compliance-oriented from a regulatory standpoint, such investments in the equity share capital of the company are commonly preferred through private equity funds or venture capital funds. The entity making such investments may be referred to as the “Investor” for purposes of further discussions.
Third Party Investments:
Seeking third party’s investment in the business is a viable option for the industry and there are several professionally managed private equity funds and venture capital funds that are willing to fund the business through investments in the company (“Company”). Investments are typically structured through subscription in the equity or preference share capital of the Company and shares are usually issued at a premium. The Investor prefers to have a representation in the Board of Directors of the Company through its nominee director(s) having certain affirmative voting rights on critical financial and management issues related to the Company.
The issues related to the share holding pattern, issue price of the shares issued to the Investor, control and management of the Company, reserved matters requiring affirmative voting rights of the Investor (or its representatives), representation on Board of Directors, etc., are addressed in detail in the Joint Venture and Shareholders’ Agreement (“Investment Documents”) that are executed in relation to the investment. While the funding provides the necessary fuel for growth and expansion of the Company, there are some important terms that should be careful in negotiating while seeking investment including: