Legal Documents
Jul 03
One of the key differences between getting money from the first three F’s (friends, family and fools) to angel investors is the need for legal documentation.
Most angel investors will insist on a legal agreement which governs the relationship between them as minority shareholders and the company. The main agreement is going to be the Investment Agreement. Potential shareholders will also want to see the Articles of Association to see what the company can and cannot do without getting permission from shareholders (and how many shareholders need to permit this action).
If you are not careful as an Entrepreneur you can find yourself spending a small fortune (£5,000 plus) on getting some very basic legal documentation in place. This is money which a start up on limited resources would much rather spend in other areas I am sure.
Nonetheless, it is important that you have signed documentation in place. It is important to remember at all times that you will have a contractual and therefore legal relationship with shareholders. I try to (and 90% of the time I succeed!) have a very friendly relationship with the companies I invest in but I need the comfort of having our relationship defined in legal terms.
Given the cost of acquiring legal documents, I have noted a few websites which give you access to the key documents you need for free. One of them is on the BBAA website http://www.bbaa.org.uk/index.php?id=147
Another site which is a little out of date but well worth having a look at is http://www.tomslaw.com/?allowin=1 it is run by a not for profit organisation (FISMA) and is a much more extensive bible of documents.
Please be aware though that these are generic documents based on UK law and because they are free there is no recourse if things go wrong - so please do use with caution!
They are a very good start though and I have used some of the documents from Toms Law myself. In our case, we adapted the skeleton for our purposes and then got it reviewed by a lawyer (it cost us £500 not the normal £3,000)
Hope this is useful advice.
Hi and welcome to my blog. 
Jul 03 at 12:56
also try
http://www.docstoc.com
rapidly growing resource
Jul 03 at 18:40
Some very good points here, Permjot . One thing that often escapes companies seeking investment is the early preparation that’s needed. Including making sure their existing legal and statutory documentation is in order.
It’s easily overlooked in the rush of starting and growing a business but it’s a lot better to get it agreed when things are running smoothly and everyone is happy (if a little stressed). It’s a lot harder to sort these things out when there’s pressure and emotions are running high.
Some key elements to look out for in a legal document from an investee’s perspective are:-
The amount being invested (and how it’s structured between debt and equity - many Angels are now following VC models with thin capitalisation)
The amount of equity (shares) being given to the investor
The class of the shares
The rights of the new shareholders (pre-emption rights; director positions; consequences of non-repayment of debt etc.)
Any side agreements (management contract; shareholders agreement)
Any warranties provided (these can be very important later in the relationship or if any miscommunications or omissions are discovered)
Although it costs, it can be far better to incur a little money on a good lawyer now, than a whole lot more money in litigation at a later stage.
Jul 03 at 22:53
Some really useful material - thank you.
Please feel free to submit a post - explaining some of the terminology in greater detail. Happy to post reader generated blogs if they help inform