INVESTING ANGELS AND CONTROL DEMONS:
Small Business Investing and Global Economic Recovery
Business lawyers understand that as the global economy recovers from one of the worst financial crisis in the past century, many small businesses, with international sales, are examining options to obtain additional operating capital. While banks and traditional financial institutions, still risk averse from the economic crash, remain reluctant to underwrite a business ventures that they do not understand, or may seem remotely adventurous, many individuals and organizations are willing to extending a financial hand to small businesses and aggressively growing companies.
The business law and litigation concern that arises when small businesses obtain financing is whether the financing offered is by an angel investor or a venture capitalist demon. Oftentimes, an offer of capital has strings attached to it, such as an equity interest in the company; a convertible debt option; an option for majority interest; or simply a controlling presence of the Board of Directors. Small businesses do not consider the ramifications of accepting aid offered by such “Money Men.” If the investor is truly an angel investor, then a business is fortunate to have a mentor and have an investor who has the company’s growth and best interest at heart. Typically, angel investors will seek an equity interest, but will contractually agree not to interfere with the management and affairs of the company.
To the contrary, venture capitalists will require financially strapped and/or highly leveraged businesses to transfer immediate control of the Board of Directors, and may require their own management personnel to be present within the company before extending financial aid. Although the initial offer of financing seems attractive, devolving control to third parties and individuals who do not necessarily have the company’s best interests at heart, often results in the company being torn apart, with its pieces being sold to the highest bidder. Most significantly, the company founder is left out in the cold looking in, as the company he or she founded is being manhandled by strangers.
When business lawyers negotiate with financiers for cash injections, whether by way of equity or debt, options or debentures, it is important to identify the desires and the performance outlook of the financing entities. Unless a financing entity is willing to allow the company and its management some latitude to course correct the company or to implement management changes, the acceptance of a financial windfall is tantamount to a sale of substantially all of the business. A prudent business lawyer will ensure that the financing documents clearly delineate roles and responsibilities, and insist on uncomfortable conversations with both the financier and management with respect to the goals of the company. It is also important for business and corporate attorney’s to identify a refinance of a debt injection, if possible, and discuss a repurchase of any convertible options upon the occurrence of certain management and financial benchmarks.
If you have any further questions about financing and capitalization of small to mid-size businesses, please call the business and corporate lawyers at The Vethan Law Firm, P.C.
For more information, please contact:
Charles Vethan
The Vethan Law Firm, PC
( 281) 558-2220
http://www.businesslawyertexas.com
