Do you invest in a Polish company? Check to what issues you should pay attention!
Is it really a good idea?
The analysis of a good investment has nothing in common with a gut feeling or good faith in the company’s success. It is necessary to examine how the market on which the company in which you want to invest operates. Only after a detailed analysis of the company’s operations, profitability and the state of its finances can the investor move to specific steps to formalise its relationship with the company.
Investment agreement as a key to success
Even a highly promising investment carries a risk against which each investor has to hedge. The first step in starting business cooperation between the company and the investor should be a properly constructed investment agreement. Its provisions must, on the one hand, motivate the company to continue its development and, on the other hand, protect the investor against the potential failure of the company or its disloyal behaviour.
Articles of association
It is also good to know that the investment agreement should be accompanied by good articles of association that will determine the basic relationships between the investor and current shareholders of the company as future business partners. The articles of association should regulate the manner of making decisions in the company, and the dividend policy.
Clauses that will protect you
When negotiating an investment agreement or articles of association, it is worth using practice-based mechanisms and introducing them appropriately to the articles of association. The following part presents an overview of the most interesting clauses used in the investment agreements:
This clause protects the investor in the case of the sale or liquidation of the company, and guarantees the payment of a specified amount, regardless of the circumstances.
Example: The investor contributes PLN 200,000 to the company. It stipulates in the articles of association that in the case of the sale or liquidation of the company, it will receive on priority basis PLN 200,000 (increased every year by a few percent). The shareholders may distribute the remaining amount only after the repayment of the investor.
This clause makes it possible to measure the investment in a flexible manner. The application of an earn out clause consists in dividing the price for the share in the investment into two parts. The first part is paid directly after the transaction with the investor, while the second part of the price is paid later. The value of the second part is usually variable and depends on the company’s financial results.
Operational exclusivity requirement
This clause requires for a limited period of time the devotion of all time to the development of the project to which the investor allocates capital. It protects the investor against a lack of the business partner’s ‘care’ of and involvement in the investment.
The idea of vesting consists in motivating the business partner through gradual transfer to it of an increasing number of shares in the company. At the same time, it may be stipulated that, in the case of a specific circumstance (e.g. upon commencing competitive activity), it will be necessary to return the shares received.
Lock-up is an obligation not to dispose of shares within a specified period of time. It guarantees that the investor will not withdraw from the investment too early and will not resell its shares to another person. On the other hand, the investor can be sure that the business partners believe in their idea and will not resign from its implementation too early.
This clause applies most frequently to companies in which there are two shareholders and each of them owns 50% of the shares. If a decision stalemate occurs in a company (e.g. it becomes impossible to obtain a majority of votes), each shareholder has the right to buy the shares held by the shareholder voting differently at the price determined thereby. However, if this shareholder does not want its shares to be redeemed, it may defend against this by buying the shares of the shareholder requesting the redemption under the same price conditions. This clause is therefore an effective mechanism to prevent the occurrence of a decision deadlock between the shareholders.
The call option (purchase option) consists in the shareholder’s right to request another shareholder to sell its shares at a specified price. The put option (sales option) allows the disposal by the authorised shareholder of a certain number of shares at a specified price to the obligated shareholder. The exercise of the option may be limited in time and subject to specific events – e.g. a violation of the non-competition clause or operating exclusivity. Its introduction in the articles of association or investment agreement helps to effectively protect against the necessity to remain in the company with a shareholder that has violated its obligations or business arrangements.
Safer with an advisor
As the above examples show, a well thought-out investment often requires complex solutions. Therefore, before signing the investment agreement or articles of association, it is worth undertaking cooperation with a professional advisor that will not only help find appropriate solutions in a specific situation, but also implement them effectively.