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  • Overview

    1. Friends and family investment? You should still document it.

    Whilst you may have a close relationship with your friends and family and a certain level of mutual trust, there are still important issues you should agree and document just in case something happens or the venture goes wrong. Sometimes personal feelings can get in the way of the professional relationship required in a business venture; documenting the terms of your relationship at the outset will help ensure there are no hard feelings if difficult decisions are required later down the line.

    Initially, you may both agree that their investment is paid back first. However, you may decide that you want to invest profits into the business to grow it before paying them back or, if further funding is required, other investors may come on board and take priority. If you are going to issue shares in return for the investment and your investor is looking to take advantage of tax reliefs available (e.g. the seed enterprise investment scheme or 'SEIS'), then you will need to ensure their shares comply with the scheme requirements. Any rights attaching to their shares will need to be thought through carefully and documented in the company's articles of association.

    Investment documentation can also provide for what happens when the worst happens for example, the death of the investor. It can provide that their shares are kept within the family or transferred back to you rather than potentially passing to a beneficiary of their estate outside of your family.

    2. Being lent cash? You should review the terms of the loan carefully.

    Depending on the source of the loan, the lender will probably have standard form loan documentation that the company will need to sign up to. No doubt your business will need further financing in the future and you should ensure the terms of the loan don't preclude you from doing this. Likewise, repayment terms should be checked carefully and you should also check for any matters that constitute an event of default thereby giving the lender the right to call the loan in early. A solicitor can review the loan terms carefully for you and provide you with practical advice to ensure you are getting a fair deal.


    3. Bank asking for personal security? These documents are high risk and often require independent legal advice.

    If a bank agrees to grant a loan facility to your business, it will no doubt seek security in the form of a personal guarantee given by you. This type of security gives the bank the ability to recover any money, liabilities or commitments owed by the company to it from you personally. You will need to pay the bank on demand any sum the bank requests from you. This can have severe consequences on your personal financial situation and so you will need to instruct a solicitor to review and advise you on the security documentation before the company signs up for the loan.

    Follow the link to read the rest of our: 20 Legal things series.
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By submitting an enquiry through 'get in touch' your data will only be used to contact you regarding your enquiry. If you would like to receive newsletters from Thomson Snell & Passmore please use the separate form below.

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General Private Client UpdatesGeneral Commercial UpdatesConstruction UpdatesCourt of Protection UpdatesAgriculture & Rural Affairs UpdatesCommercial Property UpdatesEmployment UpdatesDispute Resolution UpdatesCorporate & Commercial UpdatesCharities & Not for Profit UpdatesFood & Drink UpdatesEducation UpdatesTransport & Logistics UpdatesFamily Business & Owner Managed Businesses Updates

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Jargon Buster