October 29th, 2012 / Insight posted in

New investor can demand change

BS writes: A private investor will be helping us to fund the new infrastructure that is needed for our growth plans. The amount being raised is not large given the turnover of the company. Nevertheless, our investor has been making numerous requests, the latest of which requires my managers and me to sign new service agreements. Can you explain why he wants this?

 The investor is backing the people behind the business. He will want to ensure that the terms on which they are employed are clearly documented and adequately protect the company and his investment, writes Jon Sutcliffe, a partner at Kingston Smith LLP.

 

Many companies do not implement service agreements until they secure their first external investment. Where employment contracts are already in place, investors often find that these are inadequate and need to be clarified.

Apart from the obvious terms such as salary and bonus levels, investors will look for other clauses. A sensible notice period ensures that if a key member of management resigns, the company has time to search for a replacement, minimising any disruption.

It is common for obligations restricting the disclosure of confidential information by an employee to be updated to protect the property of the company. Investors also look for clauses that protect the goodwill of the company. These will include restrictions on being involved in competing businesses or poaching customers or employees.