Taking on additional investor

Discussion in 'Growing and Managing a Business' started by helencrazer, Sep 30, 2015.

  1. helencrazer

    helencrazer
    uix_expand uix_collapse
    New Member

    Joined:
    Sep 30, 2015
    Messages:
    2
    Likes Received:
    0
    I really need some input. We are a startup with an equity investor. If another investor approaches us to invest, do we have to clear that with original equity investor? Will it cut the original investors profit or will we pay original investor first and second investor last?

    Hope this makes sense.
     
  2. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Your written agreement with Investor 1 is the controlling doc. It should have a section which handles subsequent capital infusions and restructurings, and it's a section that Investor 1 would've insisted on the agreement containing, if s/he was "investment-savvy" at the time of his/her investment.

    It's pretty standard stuff for the agreement to give earlier investors some form of dilution protection against later investors. Such protection comes in a variety of flavors (e.g., "first refusal" rights), but in general the idea is to prevent the earlier investors from seeing their share of the pie reduced without their first having the opportunity to maintain their share by participating in the subsequent capital-raise round, or at least to give their consent thereto.

    So your first stop is the investment agreement that was put into place when Investor 1 came on board. Then find the anti-dilution clauses for the governing answer to your question.

    In the event that no such agreement was drafted and signed, then it's likely that local law will have the final word on whether, and to what extent, your arrangement with Investor 1 is affected by a new capital infusion from Investor 2.

    Cheers,
     
  3. Business Attorney

    Business Attorney
    uix_expand uix_collapse
    Premium Member
    Premium Member

    Joined:
    Mar 22, 2009
    Messages:
    604
    Likes Received:
    289
    If you had a formal agreement with the first investor, the Arcsine is correct that you need to see what your agreement said.

    The second step is the entity's organizational documents (articles of incorporation and bylaws, in the case of a corporation, or articles of organization and operating agreement, in the case of an LLC).

    If there is no agreement and the organizational documents contain no applicable provisions, then as Arcsine also pointed out, the governing law will determine what rights, if any, the original investor has with respect to subsequent investments. That, in turn, will often depend upon what the type of business entity is. The rules are likely different depending the business is a corporation, an LLC or a partnership.
     
  4. bburkeconsulting

    bburkeconsulting
    uix_expand uix_collapse
    Member

    Joined:
    Mar 27, 2015
    Messages:
    58
    Likes Received:
    11
    Good advice received so far.
    Typically in this situation equity is diluted, so you would work through this with your existing equity investor.
     

Share This Page