Funding
Section 5
employment. The period of restriction under an Investment Agreement
is likely to be between one and three years. A period in excess of 12
months under a service agreement is not likely to be enforceable.
n
Good and Bad Leaver – If you cease to be an employee or director of
the company (eg if you leave the company), you may well be required
to serve a transfer notice in respect of the shares held by you (ie offer
them for sale). The price at which you may sell those shares may be
governed by the circumstances in which you leave the company. The
negotiations with the Investor as to what constitutes a good leaver can
therefore be protracted.
Reduction in Original Shareholding (Dilution)
The main effect of new investors becoming shareholders, however, is that
new shares will be issued to them which will dilute the shareholding of the
original shareholders, including yourself. For example, if 100 shares are in
issue of which you hold 35, you will own 35% of the company. If a further
100 shares are issued to new investors, you will only hold 35 shares out
of 200 shares in issue, that is, you will own only 17.5% of the company.
Taking the example in Figure 1 in Section 3 – Company Structure, the
original position was as follows:
Figure 1
Research
Institution
(30 Shares)
30%
Dr
Red
(35 Shares)
35%
100%
Newco
Limited
33
Professor
Green
(35 Shares)
35%
