First, you need to consider consent and pre-emption rights of existing investors
Pre-emption rights: Once you have investors, they have a statutory right of first refusal (called a pre-emption right) to participate in any new investments being made into your company, proportionately to their existing shareholdings.
If someone holds 1% and the new investment being made is for £10,000, then that investor has a statutory right to participate with 1% of the £10,000 investment, at the same valuation being offered to the new investor. Therefore, the existing investor would invest £100, and the new one would invest £9,900.
Alternatively, you could scale up the total investment amount, so the original investor still puts in £10,000, but then add on an amount to it to make sure the existing investor’s new investment amount equals 1% of the eventual total (i.e. £10,000 will be 99% of the investment, and the 1% will be added on to it).
Consent rights: Additionally, investors may have a blanket right to consent to new issues of shares and investment – if so, you will need their consent to issue the new shares. In most circumstances, they will consent to this, but if you are proposing to issue shares for a lower price than they originally invested, then you would likely need a good reason for this.
Then, it depends on whether the new investor is willing to sign up to your existing shareholders’ agreement:
If they are willing to sign up to it, then you don’t need to create new, long shareholder documents. You simply arrange for the new investor to sign a Deed of Adherence to the existing shareholders’ agreement (i.e. a deed which ‘adheres’ them to the existing agreement). Once signed, they can send you the investment funds, and you can issue them with a share certificate, update your register of members and file the SH01 form with Companies House for the new shares.
If they are not willing to sign up to it, your existing shareholders’ agreement, then you may need to amend and update it to add in new terms which the new investor is willing to agree to. In this case, all existing shareholders will need to resign the new version, or sign an ‘Amendment Deed’ which confirms that certain terms are being amended. Then, once signed, you follow the same process – issue a share certificate, update register of members and file SH01 form with Companies House for the new shares.
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This Basic Training article was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated contracts and loads of startup legal resources and guides. For funding and other legal queries, contact us if you need help.