Are you a fledgling business with a great craft beverage product that is looking to secure funds to help launch or grow your business? Or are you a craft beverage company in the growth phase looking to expand its operations and need the cash to get it done? One option to raise capital is by selling shares in your business. Crowd funding can be problematic for businesses manufacturing and selling alcoholic beverages. The regulatory environment makes it cumbersome to use crowdfunding as a resource so seeking a group of investors is the more common path. But before reaching out to potential investors, you should familiarize yourself with the relevant laws and investigate the different types of shares available.
It is important to understand that investors are co-owners. They get a permanent share of the company and its future revenues. Surprisingly, many business owners believe that investors are lenders that are loaning them money and when they are paid back, there are no future ties to the company. Going into a transaction with the wrong understanding can have fatal consequences. Selling equity in your business is a pretty big deal – you’re handing over a share of your business’ potential to a newcomer who hasn’t taken the same risks or put in the same sweat equity and effort as you did to start the business and grow it to its current state.
The investor is in a relatively strong position during the bargaining process as they have the money you need while you have to convince them that you’re the person with the business that they want to buy into because the investment will yield good returns. Most investors (and their attorneys) are experienced and well versed in negotiating terms that favor them over you in the transaction since they believe they have the upper hand. Investing in fledgling companies is a risky business. The investor will be pushing for as much value and control as you’re willing to give them. After all, they want a say in how their money will be used since they are planning on seeing a return (and sooner rather than later).
For the best deal, you’ll need to come to the negotiating table prepared. You need to have done your homework and to show you are a capable business leader. Here is a list of three documents that you’ll need during the process of securing equity.
Once you’ve successfully delivered your pitch and have hooked a potential investor, you’ll start the process of negotiating what they’re going to get and how much it’s going to cost them. During the process, you’ll reduce the terms into writing before giving those to the attorneys to draft your final transaction documents. The Term Sheet should include information such as the valuation of your business, the rights associated with share ownership and the amount and timing of the investment. If either party needs to confirm certain statements made by the other party, such due diligence should be included, as well as confidentiality provisions. This will provide a clear and concise framework for the documents you’ll get drawn up once all parties are satisfied with the terms on offer. By ensuring all parties are aware of the agreed terms before the sale goes ahead, you can save time and money by reducing the likelihood that additional negotiations and/or redrafts need to take place before finalizing the documents.
Share Subscription Agreement
Once you’ve decided on the terms, you’ll need to arrange for the transfer of the shares to the new investor. The agreement for accomplishing this is a Share Subscription Agreement. It contains all of the details and terms of the investment and often warranties and guaranties by the Company that certain statements are true if they were material to the investor’s decision to invest.
In some cases, the shares may vest only if or when certain conditions are met. For example, if you are looking to raise funds for a particular project, a Share Subscription Agreement can establish the total amount that must be raised from all investors before the shares can vest in the new owners. These details are also included in the Share Subscription Agreement.
A Shareholder’s Agreement (although not required by law) is critical to ensuring your business is in the best position to continue a relationship with existing shareholders or begin a relationship with new investors. The Shareholders Agreement will ensure that the rights, obligations and powers of the shareholders are clearly set out. This can prevent your new shareholder adjusting the company to best suit them and also reduces the possibility of disagreement as everyone is aware of where they stand. The Shareholders’ Agreement will reduce confusion and ensure all shareholders are aware of their rights and obligations to the company. The clauses you require in your Agreement can vary depending on your business plans and what you’ve agreed to with your investors. Shareholders’ Agreements will include binding clauses that will cover the basics of your business relationship including shareholder voting rights, what happens in the case of death or disability of a shareholder, the power to appoint directors, confidentiality and non-competition clauses, restraints and prohibitions such as directly competing with the company, and dispute resolution processes. They may also discuss first rights of refusal, options and rights for the company to buy back the shares in certain situations and voting trusts or proxies. These all protect your business and reduce the possibility of costly litigation.
Why Do I Need These Three Documents?
Everyone starts a new business venture with high hopes that it’ll succeed and are less likely to dwell on the potential consequences of disagreements between parties. Independent of the outcome, these three documents will place your business in the best position to move forward.