Negotiating with investors; 7 tips for directors of start-ups and scale-ups

Some start ups and scale ups have such a good idea, others are only too happy to hitch a ride on it. After all, who wouldn't have wanted to buy some of Apple's shares when the company was just founded?

Yet what I unfortunately see often in my practice is that things go wrong in actually obtaining the promised funds. The funder does not always fulfill their funding promises. This happens not only to beginning business owners, but this also happens to seasoned business owners.

So what do you do? So below go some seven valuable tips from practice!

Tip 1: Know what you are borrowing

Financing comes in many forms. From a few thousand euros from an aunt and uncle to a few million at the bank. From crowdfunding to business angel(s) and from leasing to appointing additional founding partners.

All financing is good in principle because it leads to progress of your business. But your aunt and uncle will have different motives than a business angel. Therefore, be well aware of who you are borrowing money from and always ask yourself why they want to lend money to your business and what they want in return.

Look here for a list of different financing options. 

Tip 2: A good contract is half the battle

It sounds a bit like an open door, but make sure that what you agree with the lender is properly recorded in an agreement. Lay down what obligations you have to the financier. For example: interest, costs, shares, partnership, certificates, profit sharing, control (?). But above all: record what you are owed by the financier. No references to later money loan agreements, no vague terms to be filled in by the judge. In short: if you want money, write down that you will get money.

Does the lender then fail to honor the agreement? Then you can ask the court to force him to fulfill his obligations or else have the bailiff visit.

Now you may be thinking: a deal is a deal, right? That's right: a verbal agreement is also an agreement. The problem is that a verbal agreement is often only witnessed by two parties - you and the financier - and that it often comes about at a time when everyone still wishes each other well. 

Tip 3: cold, hard cash

Make sure you stay in control . The financing is for your business, so the money must be deposited in your bank account. The agreement with the financier that he will "do pay the invoices you send to him" is often a recipe for trouble: at some point the financier will start interfering in the business. Because: less money in your business, is less risk (for the investor) if things go wrong. And a Chromebook will get you just as far as a MacBook Pro. Such interference is not a desirable situation for your business.  

So get a money loan that will actually be credited to your account, and make sure that money loan agreement is correct; what collateral will the lender get? What is the term? When can he claim the loan again? Get good advice.

Tip 4: Know what you are drawing

Be aware that the funder often has more experience in contracting than you do. A contract drafted by the funder's counsel (often a corporate lawyer) usually protects the funder's interests better than the interests of your company. 

Tip 5: Don't give away too much

True, without funding, your product won't go into production. But be aware of what you are giving away. The collateral you give to the financier as security for repayment of your loan must be in proportion to the size of the loan. You may need additional financing later and that won't work if you have already given everything away.

The same, of course, applies to stocks.

Tip #6: Know what you can claim

If the financier fails to fulfill his obligations, he often commits a breach of contract. In the first place, you can then claim that the financier must comply with what has been agreed. If the financier still does not comply, you can ask the court to order the financier to still comply with the agreement.

Second, you can claim compensation for the damages you have suffered. This can also be done simultaneously with the claim for performance. Will you then get the amount of funding as compensation? Usually not.

You can claim additional damages in addition to performance. If you no longer want the lender to perform, you can claim substitute damages.

Compensation always refers to property damage. Capital damages include both loss and lost income. For example, if you could have produced a confirmed order with the investment, then you can recover those lost revenues from the lender.

Tip 7: Know your position when things go wrong

If your business goes bankrupt, the lender may foreclose on its collateral. Pledge and mortgage rights are executed (auctioned off, unless otherwise agreed). Bail means demanding payment from the guarantor.

Share capital is often worth nothing in bankruptcy. In particular, agreements in which you as business owner have privately committed yourself to the debts of your company can backfire if things go wrong. Do you have enough resources of your own to meet those obligations?

Take responsibility.

Business must be done responsibly (read about directors' liability here ). Unfortunately, as a lawyer, but also as a trustee in bankruptcies, I often experience things going wrong (unnecessarily) and business owners not taking the responsibility required of them. Problems with financing play an important role in this. I therefore hope that I have helped you a bit in the right direction with these 7 tips if you have to negotiate with investors yourself.

Surely the most important (bonus) tip is this: get good, very good, advice from someone with experience; a specialized lawyer.