Assuming the Due Diligence process has not uncovered major issues relating to the prospects or current management of the business, the parties will then prepare and sign formal documentation which sets out the detailed mechanics for the issues set out in the Terms Sheet.
In most cases the legal documentation will include the following:
- Subscription Agreement: This document sets out the subscription details such as number of shares, price of shares, number of tranches and dates of subscriptions. It will also contain detailed warranties about the company, rights attaching to shares, and any conditions which have to be satisfied before the investment is made.
- Shareholders Agreement: The ‘Big Brother’ to the Terms Sheet, this is the most important document in the deal process and sets out the ongoing relationship between the new and existing shareholders and the company as agreed in the Terms Sheet. It will be a robust, mind-numbingly boring document with many ‘standard’ legal clauses in addition to those agreed in the Terms Sheet. Despite it being hard work, the savvy entrepreneur will go through this document with a fine tooth comb, become familiar with each clause and get independent legal advice on its content. This is your Marriage Contract – or Death Warrant – and you live or suffer by the clauses you agree to.
- Intellectual Property Acknowledgement Deeds: Acknowledgement by other parties that they have no rights in any intellectual property which they developed and assign all such creations to the company. Remember that IP rights should be assigned to the company by employees and third parties like brand designers and web site developers – anyone who has ‘created’ something of value in the future.
- Executive Service Agreements: Binding “key” employees to the company for a period (usually two or three years) and will set out the employees terms of service, remuneration and bonus entitlements.