I am setting up a company with a few friends but we would like to rope in an investor. We have subscribed some ordinary shares which we can obviously afford to pay for. Now we need some extra money and we thought we can convert our ordinary shares to preference/redeemable shares and offer them to the investor at a higher price. Is this a legal /accepted method that other startups use out there? If this is not allowed (converting ordinary to preference) what other way can I approach this?
Dinesh, I think first You need to redo Your Corporate By Laws. In it you need to address your Voting structure. You and your Co Founders need to maintain control of your Company. Do You know thst there sre 5 ways in the Voting Rights structure? Next let me ask You. Do you all have EACH an employment contract? This is important as you can state o much earnings you will make in case yiu are boughtout diwn the road. But more importantly you can hide important info or trade secrecy and any invention or written material like a book in your contract. Mainly because Investors do not read this all the way thru. These are just some of the ways you can give away say 70 percent of your Company and STILL you control it!!! Securities guys will NOT tell these things and most attoneys will not either unless You ask them. Or unless they really go over the By Laws with you csrefully. This is Your foundation to a Corporation. Look up Erica Drake on LinkedIn. She has written a Book on all this and including How to Value your Start Up Company. She calls it pre development stage. You will find many many good insights that will prepare You to go seekout Investors. Look at her website too. Very infomative. Erica is for the Entrepreneurs thats why She is MaverickEntrepreneur.com And there are other avenues besides money that you may want to seekout as not all investors want money. You NEED to THiNK out of the Box. But you will need to search this out on Your Own due to Your business model. Hope this helps you. Alan infoSeeker007
The answer is yes, you can with a lawyer doing it as Maxine stated. The question is if a new investor would allow you to do it or if they found it interesting. If they want your ownership they can do it in other ways.. Unless you have a USP so compelling they will not allow you to take cash out.
This is far too crucial a corporate question to be asked online. Any prudent CEO would get a securities attorney opinion in writing and contact a transfer agent as well. Best Regards Maxine Pierson