Outside investors want to be sure what business they are investing in, and to protect themselves from being taken advantage of by insiders. Typically they might look for an agreement to include terms such as:
- The right to veto major decisions — such as significant capital investment or borrowing, the takeover of another business, or major changes to what the company does.
- The right to appoint a director to the company’s board.
- Restrictions on dividends and on how much executives can be paid.
- An obligation for the company to provide regular updates on performance
- A right of first refusal if the company needs to raise additional investment later or if another shareholder wishes to sell shares.
- Restrictions preventing key individuals from competing with the company (both while an employee or director and for a period after leaving).
None of these will necessarily be unreasonable, but you do need to be careful. It can be tempting to agree too easily when you are keen to get an investment. The biggest problem can be a fundamental difference in priorities between the investor and yourself: for example, if a venture capitalist is focused on achieving a profitable exit over the next few years.