Protecting Investors

cf-headerAs lucrative and enjoyable as investing in early stage companies can be, there are also a number of risks associated with it. One of those is that a business you invest in will fail. That’s a risk that early stage investors have to appreciate.

But there are other risks as well, particularly – and most importantly – around how investments are structured and managed. If appropriate protections aren’t put in place, it can become very easy for a company to abuse investors and deprive them of the returns to which they’re entitled. That defeats the whole purpose of investing in early stage companies, and that’s why In Crowd puts such a strong emphasis on protecting investors both before and after an investment is made. Here’s how we work to protect investors and entrepreneurs alike:

Legal Due Diligence

When a campaign is submitted, we review it very closely and require the entrepreneur to provide us with evidence to back up every claim they make. We only allow it to go live if we are comfortable that it is fair, clear and not misleading to potential investors. Before we complete the investment, we conduct a further due diligence process to ensure that all legal and structural matters are in order. If we’re not satisfied with the outcome of the due diligence, we won’t complete the investment and investors get their money back.

Commercial Due Diligence

As well as legal due diligence we also conduct commercial due diligence. This involves the review of the management team, stress testing the business model by looking at the market it operates, speaking to competitors and other people involved in the market and review of the product, key agreements and sales potential or sales history.

Financial Due Diligence

We review the financial projections and the historic accounts to ensure that the projections are realistic and that the historic figures do not cause any reason for concern such as director loans and salaries that are unrealistically high for the stage of the business.

Monitoring and Support

We ensure that as part of the subscription agreement we have with each company we have the right to appoint someone to the board to ensure both monitoring purposes and also for support and guidance. This is a very important part of the investment process and can make all the difference between success and failure.

Comprehensive Subscription Agreement

When you buy shares in a private company, there is no legal requirement to enter into a contract that sets out your rights as a shareholder. But without such a contract, you have very little protection. In Crowd requires every company that raises money to agree to a detailed set of investor protections set out in a subscription agreement (or shareholders agreement). This contract contains core investor rights and protections such as information covenants, pre-emption rights, tag-along rights and many other provisions to ensure that if the company becomes successful, the investors fully participate in that success. And, unlike articles of association or other charter documents, a subscription agreement can’t be changed without investor consent. If you want to achieve returns as an investor in an early stage company, the reality is that you need to have a subscription agreement. Every angel investor or venture capitalist would require a company to sign one before they made an investment, and we believe that our members deserve the same level of protection.

Nominee Administration

We protect investor rights as nominee. This means that investors need not worry about managing their investments – we ensure their rights are protected while still providing full economic upside and voting rights in a business. An investor’s rights have to be set out in a subscription agreement, but it would be impractical to have potentially hundreds of investors signing a contract with the company. Nominee administration means that we can provide investors with comprehensive investor protections, financial returns, tax reliefs, voting rights and regular updates from the business, without the company having to worry about managing potentially hundreds of individual investors.

That said, if you would like to hold your shares directly, and the company agrees, you are more than welcome to do so. You and the company just need to let us know this at the time you make your investment; you will then need to arrange to execute a separate subscription agreement with the company. If you choose to subscribe for and hold your shares directly like this, we will not charge you any fee on your investment (but bear in mind that you will likely end up paying more in external legal fees).

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