Relationship with your investor

Most venture capital firms’ executives have a wide range of experience. Many have worked in industry and others have a financial background, but what is more important, all have the specialist experience of funding and assisting companies at a time of rapid development and growth. Levels of support vary, however, ranging from “hands-on” to “hands-off”.

However, venture capital investors typically operate somewhere between these two extremes.

Hands-on

A “hands-on” or active approach aims to add value to your company. In addition to advising on strategy and development, the venture capital firm will have many useful business connections to share with you.

The venture capital firm aims to be your business partner, someone you can approach for helpful ideas and discussion. A hands-on investor is particularly suited to a company embarking on a period of rapid expansion.

However, day-to-day operational control is rarely sought. In order to provide this support, some venture capital firms will expect to participate through a seat on your board. The director may be an executive from the venture capital firm or an external consultant and fees will need to be paid for the director’s services. The venture capital firm will expect to:

· Receive copies of your management accounts, promptly after each month end.
· Receive copies of the minutes of the board of directors’ meetings.
· Be consulted and involved in, and sometimes have the right to veto, any important decisions affecting the company’s business. This will include major capital purchases, changes in strategic direction, business acquisitions and disposals, appointment of directors and auditors, obtaining, etc.

Hands-off

Some investors will have a less active role in the business, a “hands-off” or passive approach, essentially leaving management to run the business without involvement from the venture capital firm, until it is time to exit. They will still expect to receive regular financial information.

If your company defaults on payments, does not meet agreed targets or runs into other types of difficulties, a typically hands-off investor is likely to become more closely involved with the management of the company to ensure its prospects are turned around.

Exit options for investors

Venture capital investors and shareholder management teams are looking at some point to sell their investment or seek a stock market listing in order to realise a capital gain. Venture capital firms usually also require an exit route in order to realise a return on their investments.

The time frame from investment to exit can be as little as two years or as much as ten or more years. At the time of exit, the venture capital firm may not sell all the shares it holds. In the case of a flotation, venture capital firms are likely to continue to hold the newly quoted shares for a year or more.

The options

The five main exit options are listed below. If you are considering any of these, you will need the specialist advice of experienced professional advisers.

Trade sale

The sale of your company’s shares to another company, perhaps in the same industry sector.
The majority of exits are achieved through a trade sale. This often brings a higher valuation to the company being sold than a full stock market quotation, because the acquirer actually needs the company to supplement its own business area, unlike a public shareholder.

Repurchase

The repurchase of the venture capital investors’ shares by the company and/or its management.
To repurchase shares you and your advisers will need to consult the Companies Act, which governs the conditions of this exit option. Advance clearance from the Inland Revenue and professional accounting and tax advice is essential before choosing this route.

Refinancing

The purchase of the venture capital investors’ or others’ shareholdings by another investment institution.
This type of exit may be most suitable for a company that is not yet willing or ready for flotation or trade sale, but whose venture capital investors may need an exit.

Flotation

To obtain a quotation or IPO on a stock exchange, such as the Official List of the London Stock Exchange, AIM or NASDAQ (USA).
A stock market quotation has various advantages and disadvantages for the entrepreneur.

Involuntary exit

Where the company goes into receivership or liquidation.