Understanding your investment: Key Legal Documents

by | Apr 23, 2020

If you’re a business owner you may be considering your funding options and if you decide that getting investment is the best option for you here is a quick guide key legal documents.

Investment doesn’t just come in one shape or size; it may come from an angel investor, a friend or a venture capital/private equity firm and it may also come in any amount. The right type of investment for you will depend on what you’re looking to achieve.

To assist business owners with navigating the investment process, whether it’s still a consideration or, you’re about to kick things off, this article sets out the key transaction documents you’re likely to come across on your journey.

Back to Basics

Before we begin, it’s important to clarify that an equity investment is not a loan. It’s raising money for your company in exchange for the issue of shares in your company to the investor. Therefore, with an equity investment whilst your company will typically not be expected to repay the money to the investor, it will need to issue to the investor shares in its share capital.

Although there is no immediate return for the investor, the expectation is that when they come to sell their shares, they will get a return on the amount of money that they put in.

What’s the Process?

Due Diligence

Before investing their money, many investors will want to undertake due diligence. Due diligence can cover many areas with the most common being financial, commercial and legal. The primary purpose of due diligence is to collect information about the business to enable the investor to make an informed decision about whether to proceed with their investment. Due diligence is essentially an audit process.

The investor, or their professional advisors, will typically start by presenting you with a questionnaire. This questionnaire will seek to elicit from you certain information about your company and the business being carried on. In addition they will also request a range of documents and files including key customer contracts and financial accounts.

Before divulging any information to the investor, you should request that your investor sign an NDA (a non-disclosure agreement).

Non-Disclosure Agreement

An NDA should be entered into to ensure that: (i) certain confidential information divulged throughout the transaction is kept secret such as your company’s customers and (ii) such confidential information is not used for any purpose that is not set out in the NDA.

Please bear in mind that an NDA will not guarantee that the investor will treat all information disclosed to them confidentially; there will always be a risk that they may breach its terms.

Heads of Terms

Once the NDA has ideally been entered into, the next document will often be the heads of terms. Other names for heads of terms include ‘memorandum of understanding’, ‘letter of intent’ and ‘term sheet’.

This document will outline the key terms of the proposed deal put forward by the investor and to provide a structured basis for negotiating the documents.

You should review this thoroughly as once it has been signed an investor may not be prepared to deviate too much from the agreed terms (especially if the changes are not in their favour!)

It is important to highlight that heads of terms are not intended to be legally binding although you may agree that some express provisions will be (such as governing law and jurisdiction, costs etc).

Subscription and Investment Agreement

In exchange for the investment, an investor will ‘subscribe’ for shares in the capital of your company.

The main terms on which an investor will invest will usually be set out in a subscription and investment agreement. This document fulfils several roles, it:

  • sets out the basic terms of the transaction (as detailed in the heads of terms), including the amount to be invested and the shares (or other securities) to be received by the investor;
  • defines the legal relationship between the investor, your company, its founders, directors, managers (to the extent they are parties) and the company’s other shareholders, taking into account the terms and conditions on which the investor will invest; and
  • governs the ongoing contractual relationship between the investor, management and some or all of the other shareholders of the company.

Together with the articles of association, this is a main transaction document and will likely be heavily negotiated between you and the investor.

Articles of Association

The other main document is the articles of association. A company’s articles of association is its ‘rule book’ and it forms part of a company’s constitution. Its contents is binding on the company, its shareholders and officers (company directors and secretary, if any).

As many of the key terms contained in the subscription and investment agreement will also be contained in the articles of association or, to ensure that certain agreed terms become part of a company’s constitution, the two documents will need to dovetail with one another.

For this reason, the company receiving the investment may need to adopt new articles of association to ensure that its terms are consistent with the subscription and investment agreement and to set out the rights of any new share class to be issued to the investor.


From the very start of the investment process, it would be a good idea to ensure that your existing shareholders are on board with the proposed transaction as their consent may be required to certain matters and they will each be a party to the subscription and investment agreement (for it to be binding on them).

As mentioned at the beginning, this article details some of the key transaction documents only, not all of them. Depending on the type of investment and terms of the deal, other key documents may be required such as new service agreements for directors and assignments of intellectual property rights.

If you have any questions, please do not hesitate to contact Mireille Turner (Mireille.turner@googlemail.com).

This article was written by The Beauty Tech Lawyer.

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