Case Study

Angel investors journey from incorporation to exit

The angel investors first instructed us ten years ago. Recently, we were delighted to complete the sale of their company for a substantial return. We enabled the angel investors and the company to implement an effective growth strategy, before preparing the business for sale following its rapid growth.

The restaurant attracted the attention of a large corporation, and we negotiated the sale of the business to this corporation. Finally, we negotiated and obtained a shareholder agreement for the exit of our clients.

Read on to find out about the legal and commercial issues typical of a high growth business.

Stage 1 – Angel investors and busines start up

In 2007, a chef began trading from a pop-up food stall, outside a London underground tube station. The dishes were popular, and the chef sought investment for a restaurant in the outskirts of the City. Two angel investors looking to invest in the chef came to us in 2008. We prepared the necessary documentation.

We prepared the incorporation documents to register our clients’ shareholdings in a private limited company. Then we also prepared a shareholders’ agreement, which set out each party’s responsibilities to each other, and the reports the investors would receive. We drafted the company’s articles, which we tailored to the company’s requirements. Finally, we advised the angel investors not to become directors of the company, and instead leave this role to the chef.

Stage 2 – Growing the business

The restaurant retained us and we became the business’ legal advisors. We protected the business’s intellectual property. The chef appeared on TV and authored cookery books. Much of the business’ value was in the brand and the chef’s recipes. We registered the chef’s intellectual property, in his own name, and then granted the restaurant a licence to use the chef’s intellectual property. This proved attractive on sale. Additionally, with a recognisable brand, the restaurant chain attracted interested more investors.

Stage 3 – incentivising key employees

By 2010, the business had grown to three restaurants. Senior employees were awarded Enterprise Management Incentives (EMI). The incentives were linked to performance metrics such as turnover. This thereby incentivised senior employees to grow the business further.

Stage 4 – Preparing for exit

Together, the chef and the angels retained 80% of the voting rights. Nevertheless, there were 32 additional shareholders, some on enterprise management incentives.

The chef and the angels wanted to sell the business. We amended the company’s articles to include a drag along right. Thereafter, if the company received an offer, agreed to by 75% of shareholders, then this majority could force the remaining shareholders to accept the offer.

A buyer prepared to offer just over £10m for the business was found. The due diligence was short, as we held everything, from incorporation documents to enterprise management incentive agreements. The buyer offered the chef and the angels a 15% share in the company following sale.

Stage 5 – Exit

We prepared bespoke employment service agreements to reflect the key directors staying on after sale. Additionally, we prepared a tax covenant. This was limited in order to protect the chef and the angels in the future. Then we prepared a share purchase agreement for all 35 shareholders, and exercise notices, which included the enterprise management shares in the sale. We worked to assign the leases to the premises occupied by the restaurant to the buyer. Finally, we also prepared all of the corporate and commercial  documents.

The chef wished to retain the registered intellectual property. So, we ensured that our licence remained in force following completion of the sale. However, we varied the territory and use of the licence, so that if the restaurant under the new owners failed, the chef retained the right to use his IP elsewhere, for example, in another restaurant.

Catherine Gannon

Catherine is an extremely experienced solicitor, having been qualified since 2000, and deals with all types of corporate and commercial matters and advice and also tax law.

Catherine is well known for turning complex problems into solutions, priding herself on always finding a way. In her spare time she runs Gannons!

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