Q:
I want a cash injection of £5,000 into my business, and have an investor lined up in return for 10 per cent equity in my company. How and when does one pay an investor back? Is it 10 per cent of the profit each year, and for how long?
Jan 04 2011
Answered by: Clive Lewis Ask a question
It is usual for a business and an outside investor to sign a shareholder agreement. This can cover any aspect of the control and management of the business such as:
• Whether the outside investor gets a seat on the board
• The information the outside investor can expect to receive such as monthly management accounts
• The extent to which the business can recruit new staff or change staff remuneration without the outside investor’s agreement
• The extent of any dividends out of profits.
It is highly unusual for an outside investor to expect to be repaid on a piecemeal basis such as you suggest. They usually retain the shareholding but expect to realise their investment when the business is sold. They usually look for returns of 50 per cent per annum. Their “exit” is usually within three to seven years of making the investment. The shareholder agreement will often prevent the business accepting any further outside investment without the external investor’s agreement.
You need to talk to your outside investor urgently. You should get issues such as the return the external investor is expecting and how they plan to exit from the investment sorted out as soon as possible. You might want to talk to your accountant who should have experience of shareholder agreements.
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