Check your eligibility to invest

For certain investments, you will need to establish if you are a High Net Worth Individual, a Sophisticated Investor or a Restricted Investor. It is important you establish your status early on as you will need to identify appropriate opportunities and self-certify your status if you go ahead.

Review the business plan

Most investments are unsecured meaning you need to be confident in what is on the table. The business plan is the first step, but be cautious when reading. It will likely paint a very positive picture for the business going forward as its sole purpose is to attract investment. This will be especially relevant if drafted by the business owners themselves rather than regulated advisers.

Your due diligence process (explained below) will be your safety net to ensure that the business is what you expect it to be.

Check your tax position

An independent finance adviser can assist you in your investment and advise on financial aspects of investment such as reliefs. This is particularly important in the early stages as the way you structure the deal may impact your eligibility to reliefs (for example, preferential shares and their effect on EIS relief).

Draft the term sheet (Heads of Terms)

Unlike the business plan which will forcast the ‘path’ for the business, the heads of terms are the first step to detailing the deal (commercial and legal terms) between an investor and business. For example, how much is the investor willing to put in, what is the proposed return for the investor, what powers will they hold, will they be appointed to the board as an investor director?

The term sheet is normally not legally-binding, although particular clauses may have legal effect such as confidentiality, exclusivity and arrangements for costs between the parties.

Draft a confidentiality agreement

While heads of terms may cover confidentiality, some businesses may require additional protections by way of a longer form confidentiality agreement (Non-disclosure agreement). For example, to protect intellectual property.

Undertake due diligence

Due diligence involves the investor reviewing a target business’ assets and liabilities and evaluating its commercial potential. This can be complex and is normally delegated to accountants and solicitors (and other technical experts) but is crucial to establishing risk for the investor by identifying exactly what they are becoming involved with.

Make sure the relevant authorities have been granted.

As with any transaction, there is a risk that the deal is being entered into (and disclosures made) without due authority. An investor should make sure that a target company delivers appropriate (and valid!) board minutes/resolutions, shareholder minutes/resolutions and third-party approvals from lenders and other investors.

Draft the Investment Agreement

This is the formal agreement between the parties which form the legal basis of a deal.Unlike Articles of Association for a company, this is a private document and not made a matter of public record. It will outline the transaction in the context of all due diligence having been completed and certain warranties agreed. It will also govern the relationship going forward and outline key provisions such as limitation of liability, anti-dilution, pre-emption and exit provisions.  

Keep Records!

This is pretty obvious but make sure the audit trail is complete. For example, where the target is a company you need documentation regarding the deal from negotiation through the completion, as well as evidence of provenance of your financial investment AND the business’ equity including issue (if share capital is increased) and transfer of any shares to the investor.

Don’t neglect the post-completion ‘to-do’ list.

Investors should be proactive in ensuring that post-completion duties are fulfilled.

For example, HMRC forms will need to be completed if certain reliefs are used. Companies will also have post-completion notification requirements to Companies House. Many of these duties have deadlines and possible sanctions for non-compliance. Although the deadline is likely to apply to the Company rather than the investor personally, the investor may face difficulties if registrations or notifications are missed or incorrectly done.

Not to mention the fact that some investors may become investor directors meaning they will also have a director’s duties to ensure deadlines are met.