The Fundamentals of Securing Investment

Entering into industries that foster innovation, such as technology, green energy or mining of future minerals, is an exciting venture with much potential for growth. However, an issue that many of these companies face is linked to capital needed for the start-up groundwork or scaling facilities. Companies entering into an innovative space typically receive financing through various funding rounds, starting from seed funding all the way to Series C funding (this all depends on the financial needs and objectives of a company). Other businesses can also obtain investment through more traditional means, either through debt or equity financing. The path to become more appealing to investors is achieved by satisfying two main requirements: legal; and financial.

1. The Legal Requirement

Before any entity would like to invest in your business, you will need to ensure that there is some sort of structure in place. This structure tends to be observed from a top-down approach, by first understanding who are the shareholders, who are the directors, and what is the legal relationship between the main participants within the business.

1. 1. The Shareholders
      Details pertaining to the shareholding of a company are derived from the following legal documents: shareholders’ agreement; share register; and the issued share certificates. The relationship between the shareholders and the company are first determined by the shareholders’ agreement. The share register is a summation of the shareholder story (present and past) within a table format. The share certificates basically detail and certify the ownership of each individual shareholder. These documents are critical, in order to put potential investors at ease knowing that there is some sort of structure in place and that ownership is understood and respected.
   2. The Directors
      The primary document necessary for describing the extent of control of the directors is the Memorandum of Incorporation (‘MOI’). The Companies Intellectual Property Commission (‘CIPC’) provides standard MOI’s to all companies registering on the CIPC platform. You can also submit manually created MOI’s, which best cater to your business needs yet it is advisable that this is handled by an attorney. It is important that you sign the MOI as soon as you register your business, so that there is structure from inception.
   3. Further Legal Relationships
      This would be applicable in the case of employees (as far as there are employment contracts in place), service providers or clients (in terms of service level agreements or a similar arrangement). By having legal documentation describing the aforementioned relationships, this gives investors an idea of the monthly incoming or outgoing costs.

2. The Financial Requirement

By there being some sort of legal structure in place, that creates the impression that there are accountability and responsibility measures in place conveyed through the abovementioned legal documents. But now to create a sense of transparency and trust (in terms of how well you know your business and industry), there are certain processes necessary. These processes are as follows: business plan; bookkeeping; and valuation.

1. 1. Business Plan
      The business plan basically shows the potential investor that you have done your market research and thus have a thorough understanding of your business and industry. This will put your potential investor at ease, by showing that investor that you have the adequate skills and knowledge to take your business forward.
   2. Bookkeeping
      By having a clear annual financial statement or monthly management account, you will have an understanding of the current standing of your business and so will the potential investor. If your business’ books are in order, it is more likely that potential investors will trust your competence and capabilities (in terms of your understanding of your business and where it is heading towards).

      

   3. Valuation
      A potential investor demonstrating interest in your business and presenting you with a proposal, all forms part of the negotiation process. Before you enter into a negotiation, it is best that you understand your bargaining position and the bargaining position of the other party. The first step to understanding your bargaining position is to understand what is your business currently valued at. That is where a valuation is helpful and can be used to guide the negotiation process.

Tokyo Ndlela Attorneys Inc. are well-versed in providing you with guidance and advice in terms of the legal aspect of the investment process. We closely work with Finance Hut (Pty) Ltd, which is a consulting firm comprising of chartered accountants and tax professionals, that can assist with the financial aspect of the investment process. If you need assistance or have any queries, please feel free to contact us.

Written by Tokyo Ndlela, Managing Partner of Tokyo Ndlela Attorneys Inc.