How Private Investments are Structured
By Alex Tanglao, Last updated: 2021-10-21 (originally published on 2017-06-25)
There are several ways in which a private investor may choose to invest in your business.
The most common approach is through ordinary shares. You agree to a fixed cash investment from the investor and the number of shares that the investor receives in return. As a holder of ordinary shares, the investor is entitled to dividends and has the right to vote on company matters.
You will need the following legal documents when raising money through ordinary shares:
This document is a statement of the proposed terms and conditions in connection with the investment. This document is usually prepared by the investor.
This document sets out how a business will sell ordinary shares to investors and usually incorporates the terms agreed upon in the Term Sheet (Ordinary Shares). The agreement records the parties’ rights and obligations in the shares and the share allotment process.
A new investor will need a Share Certificate as evidence of his or her shareholding in the company.
In a later stage of the business, an investor might want to choose to invest through preferred shares, which grant additional rights to the investor. This is more common in later series financing once the business has a predictable revenue stream. Typically, the invested amount is much larger.
A convertible note is a short-term loan that converts into equity. Investors loan money to a company, and, rather than receiving their money back with interest, they receive shares in the company’s next round of funding, normally at a discount to the price paid by other investors in that round (typically around 15- 20% less). In short, these are debt instruments backed by the equity of the company.
You will need the following legal documents when raising money through a convertible note:
This document is similar to a Term Sheet (Ordinary Shares) in setting out the terms and conditions of the investment, but, in this case, it is for an investment through a convertible note detailing how and when the loan will convert into equity.
This document details the terms of the loan provided by the investor, including the provisions for the loan to be converted into equity.
A new investor will need a Convertible Note Certificate as evidence of his or her shareholding in the company.
Simple Agreement for Future Equity (SAFE)
A private investor can invest in your company using a SAFE Agreement. It is a relatively new concept and is very similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company, and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding. In this case, use a SAFE Agreement.
- Seed Investment Agreement (Ordinary Shares)
- Term Sheet (Ordinary Shares)
- Share Certificate
- Convertible Note Subscription Agreement
- Convertible Note Term Sheet
- Convertible Note Certificate
- Convertible Note Instrument
- Simple Agreement for Future Equity (SAFE)