November 16, 2017

3 legal tips for startups allocating shares to an investor

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

4 tips for startups allocating shares to an investor

Updated: 8 December 2019

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 

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

Got questions or comments about allocating shares? Leave them below. 

I wish you success in your ventures!

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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