Bringing in a new investor or selling shares (equity) of your company is a significant step that typically involves several documents. The exact contracts can vary depending on the size and type of investment, but here are the common ones:
- Term Sheet or Heads of Agreement: Before formal contracts, many companies and investors sign a non-binding term sheet (or “heads of terms”). This outlines the key economic and control terms of the deal – for example, how much is being invested, at what valuation or price per share, whether the investor gets any special rights (like preference shares, board seats, veto rights on certain decisions), etc. While not legally binding (except possibly certain clauses like confidentiality or exclusivity), the term sheet sets the roadmap and ensures both parties agree on fundamentals before incurring legal fees drafting detailed contracts.
- Share Subscription Agreement / Investment Agreement: If new shares are being issued by the company for the investor, a share subscription agreement (often part of a broader investment agreement) is used. This is a contract between the company and the incoming investor in which the investor agrees to subscribe for (buy) a certain number of new shares at an agreed price, and the company agrees to issue those shares to them. This agreement will include the investment amount, the closing conditions (e.g. any approvals needed, or that certain documents must be signed at completion), and often representations and warranties by the company to the investor about the state of the business (for example, the company might warrant that it has no undisclosed debts or that it owns its key intellectual property). In an investment agreement, existing key shareholders often join as parties too, especially to promise certain things (like non-compete undertakings or to vote in favor of necessary resolutions).
- Share Purchase Agreement: If the transaction is not issuing new shares but rather an existing shareholder selling some of their shares to a new investor (or another existing owner), then a share purchase agreement (SPA) is used. This is between the selling shareholder(s) and the buying investor. It covers the number of shares being sold, the price, and any conditions to the sale. It also typically contains warranties from the seller about the company (or at least about their title to the shares and capacity to sell) – though in smaller deals sometimes warranties are limited because the buyer can do their own due diligence. If the investor is buying shares from the founders, the SPA ensures the transfer happens properly and might include provisions like the founders remaining involved in the business for a period of time (sometimes called “lock-in” or “earn-out” arrangements if part of the payment depends on future performance).
- Shareholders’ Agreement Update: As discussed above, when a new investor comes on board, the existing shareholders’ agreement (if you have one) will typically be updated or a new one will be signed to include the investor and to reflect any new rights. Investors, especially institutional ones like venture capital funds, often require certain protective provisions. These can include preference shares (shares that have preferential rights to dividends or to assets on a sale of the company), anti-dilution clauses (to protect them if a future funding round sells shares cheaper than they paid), and veto rights on major decisions (like changing the business, raising more funding, selling the company, etc.). The updated shareholders’ agreement will spell out all these rights and obligations between the founders and the investors. It basically becomes the new “constitution” of the owners’ relationship going forward.
- Articles of Association (Amended): If the investor is getting a new class of shares (such as preferred shares with special rights), the company’s articles of association need to be amended to create that class and set out those rights. Often, the investment process includes adopting new articles at completion. The new articles would contain things like the rights of preferred shares (e.g., their dividend rights, liquidation preference, conversion rights to ordinary shares, etc.). The articles might also be amended to reflect other governance changes (for instance, increasing the threshold for passing special resolutions if the investor wants more control, or adding provisions about dragging/tagging shares on exits). These changes require a special resolution of shareholders (75% approval), which investors usually secure as part of the deal.
- Disclosure Letter: If the investment or purchase agreement contains warranties (promises about the company’s state of affairs), the existing owners or the company will provide a disclosure letter to the investor. This letter lists any exceptions to those warranties – essentially “telling the truth” about any issues so that the investor can’t later claim those were hidden. For example, if there is a pending lawsuit or an unresolved tax inquiry, the disclosure letter would mention it, thereby preventing the investor from suing for breach of warranty on that issue later.
- Directors’ Service Agreements or Employment Contracts: Often when an investor comes in, they may require the founders or key managers to sign up to more robust service agreements (if not already in place) to ensure those individuals are tied into the company (with appropriate non-compete and confidentiality clauses, for instance) for the foreseeable future. Similarly, if the investor is taking a board seat, there might be a letter of appointment for that director.
- Other Ancillary Documents: Depending on the situation, there can be other contracts: Board resolutions authorizing the share issue or transfer, forms to file at Companies House (like a return of allotments (SH01) for new shares, or stock transfer forms for share transfers), possibly an escrow agreement if funds are held in escrow until conditions are met, or a rights agreement that covers things like intellectual property assignment (sometimes investors want confirmation that all IP created by founders is owned by the company – occasionally handled via separate IP assignment if not clear).
Bringing in an investor is complex, but the main takeaway is: don’t do it on a handshake. Use proper contracts to avoid misunderstandings and to protect both your interests and the investor’s interests. Investors will almost always insist on this anyway. Given the complexity, it’s highly recommended to involve a solicitor during these transactions. They will ensure that all necessary documents are prepared and correctly executed, and that the company complies with company law formalities (like shareholder approvals for share issues). If a full solicitor service is out of budget for a small funding round, at least consider using standardised investment agreements (for example, equity crowdfunding platforms or organisations like the UK Business Angels Association provide template documents) – but even then, some customisation is usually needed. British Contracts provides a contract review and advice service, but typically for equity investments, tailor-made legal advice is worth the cost due to the amounts and rights at stake. We provide competitive fixed-fee Gold and Platinum packages to deliver bespoke contracts. Once the agreements are in place, make sure to abide by them, e.g., note any investor consent rights when making decisions, to maintain a good relationship and stay compliant with the deal you struck.