At Navistar Legal, we want to empower small business owners to feel confident when exploring the world of investment. When it works well, it’s a boost for your business, but like any major strategic business decision, there are pitfalls to avoid.
So we have put together this three-part blog series to answer any questions you might have around investment, from the key issues to be aware of to maintaining control of your business to what you need to get in writing.
In this piece, we’ll be exploring how you maintain control of your business when you bring investors on board.
Most business owners want everything to be fair. Most want to run their businesses ethically and inclusively and for democracy to rule to ensure a harmonious and happy team.
However, when you have additional shareholders or directors, it can be complicated. Not having clear direction from one person can cause chaos.
So when bringing investors on board, at Navistar Legal we suggest that you maintain control over your business and its decisions.
What does that mean? What kinds of control are in your business?
1: You are a director in your company.
The director runs the company on a day-to-day basis.
Each director is required to adhere to certain director duties and is in a position of legal responsibility for the company.
You do not need to be a shareholder in order to be a director of the company. As you get more directors appointed then this will be called the “Board of Directors” or the “Board”.
You can choose to be the sole director of your company.
Investors do not need to be a director, but since investors know that this is where the real power lies, some may ask for the right to appoint someone as a director to act on their behalf.
2: You are a shareholder of your company.
Strictly, the only obligation of the company to you as a shareholder is to make sure that the company makes a profit.
As a shareholder you have certain rights, such as the right to dividends, receipt of financial information and to be called to any meeting of the members. Your rights are usually governed by the articles of association of a company or, if you have one, in the shareholders’ agreement.
The shareholder and director hats can create a conflict of interests so it is important when you make decisions that you know which hat you are wearing
3: You are working for the company.
This may be as a consultant or as an employee. Likely the latter, since you will probably be paid at least a minimal salary. As an employee you have roles and responsibilities to provide to the company in exchange for your salary.
So how do you maintain control?
Within the role of director and shareholder, there are several ways you can maintain control over your company when you bring on an investor. However, do be aware that your investor may decide not to invest if you keep too much power for yourself. Since it is a balance, you having too much power increases his or her risk.
1. An often overlooked aspect of control starts with not allowing anyone into your company that doesn’t match your values. This means researching to find out more about your potential director or investors.
Remember particularly for the directors and the management of the company that this is where decisions about your company are legally made. A director has the authority to bind the company and will usually be able to be nominated as a signatory on the company bank account.
It sounds obvious, but it is important that you find out more about your investors or other directors than just their name and address. As a minimum Google them, check them out on LinkedIn – have there been any complaints? If they have invested in other companies – have they caused any issues? Ask for references. Go to Companies House, check that they haven’t been disqualified as a director. Interview them, find out what makes them tick and make sure that they fit with the culture of your business.
At NaviStar Legal we have developed an investor checklist and director questionnaire so you know you have asked the important questions and help you through this process.
2. Casting vote
- Another way to control the outcome at a board level is to ensure that you have a “casting vote”. This means taking control of decisions at the board, so that if there are an even number of votes by directors on a certain matter then you will be able to make the overall decision. It is usual that the Board makes most of the decisions for a company and you don’t want to override your directors – they are there to provide balance and structure to the board - however, in an emergency it may be an important strategic option.
The casting vote is a change that you will want to incorporate into your company’s articles of association and have it agreed that you are the chairman of the meeting. This is much more difficult if you already have a board in place, but if this is a new company then you can make the rules up front.
3. To maintain control at a shareholder level, provide an investor with non-voting shares.
Offering investors non-voting shares is controversial to the investor community, but it is becoming more popular.
This involves creating one or more new classes of shares for the company in order for some to be non-voting shares. At NaviStar Legal we usually create A, B and perhaps even C class shares, depending upon the variations.
So that is empowering you with some more insight into how to maintain control when you bring investors on board.
Because you do want to stay in control of your business, don’t you?
If your business needs support navigating the world of investment, one of our team would love to speak with you. Call us on 0800 133 7509 OR book a slot to speak with a lawyer here.