4 tips for startups allocating shares to an investor

By Vivian Michael | Startup

3 legal tips for startups allocating shares to an investor

Useful tips from a lawyer for startups for allocating shares to an investor. 

After talks with a potential investor for your startup,  they may give you a term sheet or memorandum of understanding  (MOU) including the key terms for investment.

At this point, it is a good idea to get your own accounting and legal advice for your startup.

In this article we cover legal tips for allocating shares to an investor.

1. The term sheet or Memorandum of Understanding (MOU)

This document will have the key terms for the investment in your startup and these terms may include:

  • voting;
  • director nomination; and
  • cap  for employee share option plans (ESOP). 

2. The legal agreements

The legal agreements will include a share sale agreement and a shareholder agreement.

A lawyer can help you ensure that the key terms  in the term sheet or MOU are built into your legal documents. 

The share  sale agreement will outline the terms for the sale including:

  • capital and share allotment;
  • any phasing of share allotment;
  • completion date (date ownership of shares transfers);
  • GST; and
  • termination.

The shareholder agreement outlines the rights and responsibilities of shareholders and includes:

  • voting;
  • board meetings;
  • appointment of directors;
  • further financing;
  • budgets and financial information;
  • confidentiality;
  • non competition; and
  • dispute resolution.

3. Harsh terms

A lawyer can help you review your term sheet, shareholder and share sale agreement and advise you of any harsh terms. Harsh terms may include:

  • a requirement to wind up your company in the event of a decision deadlock;
  • voting restrictions;
  • unreasonable restrictions on external capital raising;
  • excessive decision making rights for investors that are not proportionate to their investment; and
  • terms that do not align to original discussions, term sheet or MOU.

4. Share registration & reader bonus!

You will need to register the share sale with ASIC and you can find out more about this step here.

Finally, we have a special bonus for our readers - the templates that you will need to complete the share registration process. You can download your complimentary templates below.


About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia that would otherwise DIY, rely on legacy contracts or go without.

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