The Next Alexa? Surfing the IP Challenges for Artificial Intelligence
13 September 2018
Our job is to help maximise your returns. Whether the investment is small or large, a one-off or a series of investments, we bring experience and expertise. It is taken as read we can deal with the legal documentation but what we can also offer is guidance on how to position the corporate structure. Supporting companies and investors over the years has created the knowledge you need.
Please do call us to discuss your investment agreement. We are always happy to provide an estimate of likely costs.
Methods of investment vary, and each method has benefits and disadvantages along with tax considerations. Our job is to take you through the issues and find workable creative solutions.
An investment can involve a fusion of:
The rights attaching to any class of share must be set out in either the articles, shareholders’ agreement or an investment agreement. If preferences are not agreed the investor will be treated in the same way as ordinary shareholders.
In many companies, the ordinary shares carry the right to vote, receive dividends and a return of equity on a sale, liquidation or winding up. If an investor requires added rights ordinary shares can be issued along with preference shares. The idea is that the preference shares provide benefits for investors over and above the rights attaching to the ordinary shares.
Preference shares usually entitle the investor to:
Convertible loan notes are increasingly common. A convertible loan note enables the investor to participate in the upside, and potentially gain control if the business does not succeed. Convertible loans can provide the best of both worlds for an investor.
Terms of the convertible loan note are up for negotiation. There are no hard and fast rules. Ideas we have seen successfully implemented include:
The big advantage to a loan over equity investment is that upon an exit or insolvency the lender as a creditor will be paid off before shareholders. Ideas to consider for investment terms under the loan investment agreement include:
The rights attaching to any loan must be set out in either the articles, shareholders’ agreement or an investment agreement. Charges and secured rights do have to be registered at Companies House. If rights are not secured the investor will rank equally with other creditors.
The top points we see of importance for investor protection to include in the investment agreement based on experience are:
Investor protection will be enhanced if major decisions require their approval – this is known as a power of veto. Ideas to include in the investment agreement include:
A popular step for investor protection is for an investor representative to have a seat on the board. The constitution of the board can be set down in the investment agreement (or shareholders’ agreement).
It is not uncommon for an investor to be granted the right to appoint a non-executive director. For example, in a technology company, the investor may seek to appoint an individual that has industry experience in launching products and taking them to market. That will help in realising a return.
Further investment brings dilution of share capital and often attempts of new larger investors to take control. The influence the investor retains will depend upon the size of his investment, value of the company for new finance rounds and terms set out in the investment agreement.
As a shareholder alone the investor will have no right to management information. Therefore, information rights have to be set out in the investment agreement. Investor protection may include the right to see:
Generally, it’s the investee company, the founders and directors who give the warranties. We can help you decide whether all managers give warranties, or, more likely, just those with control of the business.
Common limitations on the warranties which may require negotiation include:
The investment agreement should deal with what happens if something goes wrong and the investor brings a claim. Do the warrantors have joint liability, i.e. each liable for the total amount, or several liability, i.e. just liable for their share? If several liability then should there be a separate deed of contribution to apportion any liability under the warranties amongst the directors.
On the way in an investor needs to think of the way out. Investment terms should deal with:
Whether investors should be in for the long term is becoming an increasingly popular debate. The questions have intensified as the average time it takes to build a business and achieve a trade sale is increasing.
The investee business should be thinking about:
Discussions with investors involving trade secrets and confidential information should take place under a confidentiality agreement. That will create a deterrent at the very least. This is in the investor’s interest as well as the company’s as you may not want other investors to know you are in talks.
We can assist you with preparing heads of agreement for the investment, which can assist with the whole process of the investment. The heads of terms for the investment agreement will be a base to work from for the purposes of agreeing the terms of the investment.
Points to consider include:
Placing time limits on decisions can focus the mind.
Typical conditions include:
Each investment differs. However, from our experience we will know what conditions are required, and what are reasonable.
Investors along with staff can damage the business by taking ideas to set up in competition. The investee business should consider putting some anti competition terms into the investment agreement to protect other investors and the business.
Commonly, approval is required to increase share capital and amend the investee company’s articles of association. Articles of association are often drafted to compliment the investment agreement.
Often investors back people, e.g. their skills, capabilities and knowledge, rather than physical assets. To cover for that, and to provide an element of flexibility, there may be employee share schemes operated. The most common is EMI options.
Investors will be keen to limit the dilution for employee share awards. This is most commonly achieved via an option pool. The standard pool is between 10 – 20% of issued share capital.
Part of the legal due diligence is to ensure the company owns the technology and intellectual property it claims to have invented or own. Issues often arise during the intellectual property due diligence. If they can be sorted out pre-investment this prevents “surprises” at a later date when the business may have been a success and the stakes are higher. For instance, sometimes the company thinks it has acquired its IP rights from a previous venture, but doesn’t have complete ownership.
Unregistered rights in technology and IP would cover unregistered logos, brand or trading names. If important rights are unregistered, we investigate and put in steps for protection.
Registered rights would include patents, registered trade marks and registered design rights. We conduct a search of the registered rights, and ensure the company has:
I got involved with a couple of early stage start-ups. I wanted to invest some money and maintain control over key decisions. Gannons prepared a strong investment agreement which I then used for my future investments.
Gannons prepared our Investment Agreement which was clear and commercial. Our investors did not come back with many comments which was pleasing.