Timothy Kelly | Associate | Dommisse Attorneys | mail me |
There is an increasing amount of investment entering the venture capital and private equity space in South Africa and abroad. In the latest SAVCA Venture Capital Industry survey, it is said that R 6.97 billion had been invested into 841 active deals, with 53.4% of the recipients being seed or start-up stage businesses.
Assuming equity is the goal, the investor has the intention of injecting capital in the company in exchange for equity, which it may be able to sell at some point in the future for a profit.
For the investor to receive equity in the company, they will subscribe for the corresponding number of shares which the capital will convert into. However, in some cases, it may be too early to determine a fair valuation of the company, and in these instances other ‘convertible’ investment instruments may be more appropriate. These could include loan agreements, convertible notes and SAFE Agreements (simple agreement for future equity).
The founders and the investor generally have the goal of achieving alignment on elements of governance and control, ownership and incentivisation, and eventual exit scenarios.
Accordingly, the following features are particularly relevant to consider for both investor and investee:
- Founders & their incentives
It’s important to remember that equity = ownership, so the investment has the result of diluting each founder’s equity. This is an important consideration, as founder ownership in a company is directly related to their motivation to achieve growth in the business.
Achieving this balance is important especially in the context of venture capital as companies in this stage still rely heavily on a founder’s passion and vision for the company to grow, and if a founder is not properly incentivised through ownership, the founder’s motivation for growth will likely be negatively affected.
- Founder vesting
It can often be a concern for investors when investing capital into a company that the existing shareholders and founders will…
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Read the full article by Timothy Kelly, Associate, Dommisse Attorneys, as well as a host of other topical management articles written by professionals, consultants and academics in the August/September 2022 edition of BusinessBrief.
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