One area of work that I am particularly enjoying at the moment at Support Legal is working with investors providing investment to SMEs and start-ups across a range of sectors and of varying values. This is where exciting innovations, new technologies, and disruptive consumer and business practices are emerging. The investors I collaborate with are equally enthusiastic about these opportunities, with a keen interest in early involvement and a strong focus on adding value to their investments. Advising investors in this dynamic space is proving to be both serious business and enjoyable.
Conversely, I also work with start-ups and SMEs preparing to seek or take on investment, or those that have already secured it. Being on both sides of the table (though not simultaneously) offers valuable insights into aligning investors and management teams to achieve business objectives, such as scaling up.
Here are my top tips and legal considerations for start-ups and SMEs planning for investment:
1. Company Structure and Ownership Laws
Before selling equity, ensure your business structure supports equity transfers. Mainland companies can now have 100% foreign ownership in most sectors, but certain industries still require Emirati participation. Free Zone businesses must comply with the rules of their respective authorities. Typically, investors prefer a holding company in either DIFC or ADGM due to their comprehensive regulatory frameworks, accommodating various shareholding structures.
2. Shareholder/Investment Agreements
A crucial document in any investment is the shareholder/investment agreement between the shareholders in the company. Most investors I work with have a clear idea of what they expect in terms of management decisions and matters relating to control. These matters will have been discussed during the negotiation phase, but the management team should expect to see detailed provisions relating to:
Ownership percentages and voting rights
Management and board representation
Restrictions on share transfers
Dividend distribution policies
Exit strategies for both parties
Dispute resolution mechanisms
It's wise to consider your position on these matters before starting negotiations.
3. Due Diligence
The extent of due diligence varies based on factors like the investment level and the target company's age. Beyond managing legal risk, investors use due diligence to understand current business operations and identify areas where they can add value. Typically, investors review financials, legal compliance, contracts, and intellectual property. The management team can facilitate this process by ensuring financial records, corporate documents, and commercial contracts are readily accessible.
4. Regulatory Compliance and Approvals
Certain sectors require additional government approvals for ownership changes. Companies in regulated industries like finance, healthcare, and education may need clearance from specific regulatory bodies. Understanding these requirements in advance will streamline the process and build trust among parties, especially when the investor is new to the sector.
5. Intellectual Property (IP) Protection
For businesses heavily reliant on IP assets, such as technology firms, ensure that these assets are owned by the company in which the investor will invest. Investors seek assurance that the company fully owns and controls its IP.
6. Exit Strategies
Investors typically have a plan for the longevity of their investment, often aligned with growth strategies and eventual sale, whether to other investors, through a trade sale, or via listing. Strategic discussions are usually ongoing and may be included in the shareholder or investment agreement, often referencing a business plan or management team KPIs. Early discussions ensure all parties agree on business growth objectives and realisation of its value.
7. Employment and ESOP Considerations
Many start-ups incentivise their teams with employee share option plans (ESOPs), which investors need to understand to assess their impact on management and control upon exercise. Investors will also want to identify key personnel and review their employment terms and ESOPs to ensure compliance with UAE labour laws and investor requirements.
8. Confidentiality Agreements
Start-ups and SMEs with innovative products or offerings are eager to protect their first-mover advantage, which can provide a valuable head start in the market alongside other USPs. Confidentiality is therefore crucial. Investors will obviously want to thoroughly evaluate the proposition (see my comments on due diligence above), necessitating the disclosure of sensitive business information. It is wise, therefore, to enter into an appropriate NDA. This agreement may include basic terms agreed upon by the investor and management team, as well as an exclusivity period before sensitive information is disclosed. Experienced investors are familiar with this approach, and while NDAs are not easily enforced—once information is out, it's out—they remain an important part of the process.
9. Building an Ongoing Relationship
While not strictly a legal issue, this aspect impacts the negotiation tone and legal drafting content. It's vital for both parties to remember they are working towards a collaborative and long-term relationship. A good investor brings experience, resources, and capital, which should lead to achieving objectives and a successful venture. Adopting a partnering mindset during negotiations and the investment process provides a solid foundation to maximise opportunities for both parties.
By addressing these legal considerations early, start-ups, SMEs, and investors in the UAE can ensure a smooth investment process while safeguarding business interests. Whether you are a start-up or SME seeking funding or an investor looking to invest, contact Support Legal for a discussion on how we can facilitate this process.
Feel free to out via LinkedIn or to alison.hubbard@supportlegal.com to share your thoughts and questions.
Alison Hubbard is a Principal in Support Legal's Dubai office. ____________________________
This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.
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