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MShore Law
MShore Law, Attorney
Category: Business Law
Satisfied Customers: 25285
Experience:  Drafted Negotiated and/or Reviewed Thousands of Commercial Agreements
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Hello, Im contemplating making an equity investment into a

Customer Question

Hello, I'm contemplating making an equity investment into a business in the cleaning service industry, to help the owner finance a purchase of a competitor.

I would like to find out what would be the proper way to protect my interest in this venture. I'm sure I'm not the first in this situation, and there is a laundry list of clauses, restrictions, etc commonly entered in to the purchase, and/or the operating agreement.
Submitted: 5 years ago.
Category: Business Law
Expert:  MShore Law replied 5 years ago.
Thank you for the post, I am happy to assist you by answering your questions. Is your question what clauses should be in the investment agreement between you and the business you are investing in?
Customer: replied 5 years ago.
Yes, I need help putting together an investment agreement. I want to avoid common pitfals/oversights associated with putting one together.
Expert:  MShore Law replied 5 years ago.
Thank you, will you have an equity interest in the business, or are you just looking for a cash return on your investment?
Customer: replied 5 years ago.
Yes, this is an equity investment. The intention is to receive income via dividend distributions (and capital gains due to potential sale of the company after 3-6 years).
Expert:  MShore Law replied 5 years ago.
Thank you, what percentage of the company will you acquire via your investment?
Customer: replied 5 years ago.
Expert:  MShore Law replied 5 years ago.
Thank you, you need to make sure that despite the 20% ownership, if you are the only investor that you be paid first should there be any later investors, that you have preferred shares and the ability to purchase additional shares at a favorable price; a ratchet clause; liquidation preference clause; and contingent proxy. Please let me know if you need additional guidance on these points.
Customer: replied 5 years ago.
Yes, please explain the need for preferred shares, liquidation preferece clause, and contingent proxy.
Expert:  MShore Law replied 5 years ago.
Preferred shares are the most typical form of security issued in this situation because they offer the investor dividend and liquidation preference over common shares. Preferred shares also have anti-dilution protection, mandatory or optional redemption schedules, and special voting rights and preferences.

A second type of common protection is the use of “liquidation preferences”, and the “double dip” or “triple dip.” Put simply, these clauses stipulate how many “times” you must be repaid the initial investment capital before other investors are allowed to participate in the liquidation proceeds.

Contingent proxy provides for a transfer of the voting rights attached to any securities held by a key principal of the company upon his or her death to you as the investor. The proxy may also be used as a penalty for breach of a covenant or warranty in the subscription agreement.

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