Like fish need water in which to swim, private company owners need to secure capital on an almost continuous basis. Capital is necessary to develop the company’s products and services, to retain top talent and to market and promote the business. But securing capital from outside investors can cause headaches for company founders when conflicts later arise with new investors who have discordant views about the company’s strategy and business plans. For this reason, business owners are wise to accept investments from third parties only when specific conditions are in place designed to prevent and/or resolve later conflicts that threaten the company’s continued existence. This post reviews key terms company owners should consider including in their governance documents or in separate agreements with the new investors to ensure that the majority owners maintain full control over the company.
Secure Buy-Sell Agreement With Investors
If relationships with new investors turn south and the minority investors become a thorn in the side of the company’s majority owners, they will want to have the right to remove these new investors by redeeming all of their ownership interests in the business. This redemption right to exit minority investors will be available to the company’s owners, however, only if they secure a signed written agreement from the new investors at the time they make their investment in the company. If the majority owners fail to secure this redemption right from new investors when the investment that is made in the business, the owners may find themselves stuck with unwelcome investors. Without a redemption right in place, the majority owners have no ability to remove from these co-owners from the business.
Continue Reading Cautionary Note for Private Company Owners: Third Party Investors Can Create Thorny Problems