Stage 3 · Choose and negotiate financing · Lesson 5 of 6
Opening your capital without losing the house
Many family businesses in the region turn down an investor in their capital, for fear of no longer deciding in their own house. This lesson puts a number on what bringing in a partner costs, then shows where control really sits: in the shareholders’ agreement, and in the security behind a loan.
Who decides
A fund holds 30%. Who decides to sell the factory?
A family-owned processing business. A fund came in at 30%, and the family keeps 70%. Two years on, the factory is too small. The board is discussing selling it to build a bigger one elsewhere. Who has the final say?
- AThe family: it holds 70%, so it decides
- BThe fund: it brought the new money
- CWhatever the shareholders’ agreement says, not the percentage
- DNobody: while the fund is in, the factory cannot be sold
See the answer
Answer C. Whatever the shareholders’ agreement says, not the percentage
Keep two numbers apart. Your percentage sets your share of the value and your votes at the shareholders’ meeting. The length of the reserved-matters list sets your share of the important decisions. The fear of “losing the company” is about the second number, and it is often the less negotiated one, because everyone is looking at the first.
Three fears
“We don’t let outsiders in” covers three different fears
You hear the sentence in Antananarivo and in Port Louis, in old groups and in ten-year-old companies. It mixes three fears, and they do not have the same answer.
No longer deciding in your own house. Hiring, investing, choosing who runs the business. That is settled in the shareholders’ agreement, clause by clause. It is what the rest of this lesson covers.
Being made to sell one day. The fund will want to sell its stake, usually after five to seven years. What happens to the family then is also written in the agreement. It is the part people most often forget to negotiate, because it feels a long way off.
Opening the books. Budgets, margins, family salaries. The law already gives every shareholder a right to information, and a fund will ask for regular reporting, often quarterly. That fear is not negotiable. If it blocks everything, debt remains, and debt has risks of its own.
What a stake costsYour turn
Your percentage goes down; the value of your shares does not
Worked example, made up for the exercise. Two founders own 70% of a family business, and the rest of the family owns 30%. A fund offers $600,000 for a new production line. Both sides agree the business is worth $1.4 million before the money comes in: the pre-money valuation.
Worked example, made up for the exercise. Everyone keeps the same value at the round price; the total grows with the fund’s money.
Worked example
Investor’s share = amount ÷ (pre-money + amount). Here: 600,000 ÷ 2,000,000 = 30%. For the same amount, a higher pre-money valuation costs less of the company.
The values of the example. In your KAPEX space, this calculation runs on your own numbers.
The founders go from 70% to 49%: that is dilution. Their shares are still worth $980,000 at the round price, but they carry less weight in a vote. That value is not money in the pocket: it only becomes real when shares are sold.
The second thing to notice: the founders alone drop below 50%. With the rest of the family they keep 70%, provided they vote together. That is one reason to pool the family’s shares in a holding company before the round (see “The middle roads”).
Same stake, two agreements
At 70%, a family can decide a lot or very little, depending on the agreement
Two companies in the same sector. In both, the family keeps 70% and the fund takes 30%. The first signed the agreement the fund handed over. The second went through it with a lawyer and negotiated it line by line.
- Twelve reserved matters, listed by the fund, none discussed
- Board: two of five seats to the fund, including the chair
- Drag-along open to the fund alone after five years, no floor price
- Managing director removable by a simple board majority
- Six reserved matters, discussed one by one
- Board: family majority and chair, one seat and one observer for the fund
- Drag-along with a floor price, and a family right to buy first at the buyer’s price
- Managing director appointed by the family, removable for cause as defined in the agreement
Example built for the exercise from common clauses. Both kinds of agreement exist on the market; the second takes negotiation.
A family at 51% with the second agreement decides more than a family at 70% with the first. Nobody loses their company on signing day. The risk lies in an agreement nobody read line by line, and in an exit nobody prepared. Both can be fixed before signing, and very rarely after.
The agreement, clause by clause
Six clauses of the agreement decide who is in charge
A shareholders’ agreement often runs to some thirty clauses. Here are the six that bear on control, as they appear in an agreement proposed by a fund taking 30%. Open each line.
Open each clause: what it does, then what a family can write into it.
Cl. 5 · Decisions requiring the investor’s consentlist in schedule 2: twelve decisions
The reserved matters: decisions the fund must approve, even as a minority. Selling a major asset, borrowing above a threshold, changing the business, appointing the managing director, paying dividends.
The longer the list, the less you decide alone. Ask why each line is there. Cutting the list back to the decisions that really change the value of the fund’s stake is a common negotiation.
Cl. 7 · Board of directorsfive members: three appointed by the family, two by the investor
Who sits, how many votes, who chairs, who appoints and removes the managing director. A minority fund usually asks for one seat, sometimes two, and sometimes a non-voting observer.
Look at the chair and at the rule for removing the managing director: they are what count when the board is split.
Cl. 9 · Pre-emption righttime to respond: 30 days
If a shareholder wants to sell, the others may buy the shares first, at the same price.
Without it, a cousin who sells can bring in a stranger. It also stops the fund selling its stake to a competitor before the family has had the chance to buy it.
Cl. 10 · Tag-alongif a shareholder sells, the others may sell theirs on the same terms
When a shareholder sells, the minority can sell alongside on the same terms. It protects whoever is in the minority, here the fund: if the family sells to a group, the fund is not left alone with the new owner.
It is normal and rarely argued over. Remember what follows from it: a buyer for the family’s shares will often have to buy the fund’s stake too.
Cl. 11 · Drag-alongthreshold: 75% of the shares; after five years without an exit, this right is open to the investor alone
When a buyer wants 100%, the shareholders holding the threshold set in the clause can oblige the minority to sell on the same terms. Here, neither the family (70%) nor the fund (30%) reaches 75% alone. But the second sentence gives the right to the fund alone after five years.
This is the line through which a family can be made to sell. It is negotiable: a floor price, a longer period, and above all a family right to buy first at the price the buyer offers.
Cl. 13 · Information to shareholdersquarterly accounts within 45 days, annual budget before the financial year starts
Accounts, budget, regular reporting, access to the auditors. The principle is not negotiable.
Frequency and format are. A two-page quarterly report is a very different thing from permanent access to the ledger.
An example, not a template to copy. Thresholds matter as much as whether a clause is there: have yours read by a lawyer.
Of these six clauses, a drag-along with no family right to buy first is the one that can cost the family its company. The sentence to have added is short: “before any sale to a third party, the family shareholders may acquire the investor’s stake at the price offered by that third party”. The fund gets its price, and the family keeps the option of staying at home, if it can finance that purchase.
What the fund asks for
A minority fund wants to sell its stake one day, not to run the business
An investment fund buys a minority stake to sell it for more. It holds it until its exit, usually after five to seven years. It follows several companies at once with a small team: running a lychee plant or a chain of pharmacies is not part of its job.
What it asks for follows from that. An exit, because it is paid when it sells. Information, because it has no security over your assets. A board seat, to be in the room when decisions are made. A say over what changes the value of its stake. It does not usually ask for your job or your brand.
A competitor or a group looking for a subsidiary does want to run the business. That is a sale, and a different negotiation. If someone talks about 30% and “taking operations in hand”, ask plainly whether this is a minority investment or a takeover in several steps.
What loses the company
A shareholder has no security over your assets. A lender often does.
Turning down a partner often leads to debt. Debt asks for no board seat, but it has other ways of costing a family its company.
A loan is secured: a mortgage on the factory, a pledge over the equipment, a personal guarantee from the managing director, sometimes from the spouse. An acceleration clause can make the whole principal due if a ratio set in the contract is missed. If the business can no longer pay, the bank can enforce its security, through the procedure set by the country’s law.
A dollar loan repaid from ariary revenue gets dearer when the currency falls. $200,000 at 4,380 Ar/$ is 876 million ariary today. If the ariary loses 20% of its value, it takes 1,095 million, 219 million more for the same debt.
A shareholder, by contrast, shares the risk: if the business does badly, it loses its money alongside you. That is why it asks for rights in the agreement. Those rights are negotiated before signing, like the security on a loan.
The middle roads
Between a loan and selling a stake, there are other forms
If the answer is still no, some forms bring in long-term money without giving a vote, or push the question back. Each one has a price, in yield or in time. What is possible depends on the country and on your company’s legal form: ask your lawyer.
Mezzaninesubordinated debt
Convertible bondobligation convertible
Preference sharesactions de préférence
Family holding company
Buy-back optionfamily call option
In your file
Write down the governance you want before someone proposes theirs
If a fund approaches you, ask for its model agreement before the term sheet, and go straight to the drag-along. In your file, four fields already say what kind of partner you are looking for.
“Funding” step. Tick the profiles that take minority stakes, such as “PE / Venture capital fund” or “Family office / Private”. “Open to all sources” is less precise: if you choose it, say in the description that you are looking for a minority partner.
Same step. Both figures must fit with the “Amount sought”: $600,000 on a pre-money of $1.4 million gives 30%. Run the numbers in the calculator on the “What a stake costs” card.
“No exit planned” rules out most funds, which usually sell after five to seven years. Choose a realistic horizon, and say how you see the exit: a buy-back by the family or a sale to a third party.
“Organisation” step. If a family holding company exists or is planned, say so. An investor prefers a single counterpart for the family.
- Investor’s share = amount ÷ (pre-money + amount). Your percentage goes down; the value of your shares at the round price does not.
- Control is read in the agreement: reserved matters, the board, the drag-along and the family’s right to buy first.
- A shareholder has no security over your assets; a lender often does.
FAQ
Does a SAFE let me avoid opening my capital?
No, it postpones the moment and sets the price by a formula. Example: $100,000 on a SAFE with a valuation cap of $2 million after the investment (post-money) and a 20% discount. At the next round, at $3 million before the money: with the cap, 100,000 ÷ 2,000,000 = 5%; with the discount, a price equivalent to $2.4 million, about 4.2%. The investor takes whichever is better for them: 5%. The SAFE comes from US practice: check with your lawyer how it works under your company’s law.
Can the fund replace the managing director?
Only if the agreement or the articles allow it. Read who appoints and who removes the managing director, and by what board majority. Removal for serious misconduct, defined in the agreement, is a common request. Removal at will by a minority fund is something to refuse.
How does the family buy back the fund’s stake when it exits?
Plan it at entry: a buy-back option, or a right to buy first at a third party’s price. On the day, the purchase will need financing, often a loan or a new investor. Start preparing a year or two before the expected date.
The words of this lesson
Each word links to its full definition in the glossary.
- Reserved matters
- The list, in the shareholders’ agreement, of decisions you can no longer take without the investor’s consent.
- Dilution
- Your share of the company gets smaller when a partner comes in. The cake grows: your slice can be worth more.
- Drag-along
- When a buyer wants 100% of the company, the partners holding the threshold set in the clause can oblige the others to sell, on the same terms.
- Tag-along
- When a partner sells its stake, the minority partners can sell theirs alongside it, on the same terms.
- Pre-emption
- If a shareholder sells, the others may buy the shares first, at the same price.
- Preferred shares
- Shares that give the investor rights beyond the other partners: being paid first, voting on certain matters.
- Shareholders' agreement
- The agreement between shareholders, alongside the articles, on what they promise each other.
- Control
- The power to decide, which rests on the agreement and the board, not only on the percentage held.
- Financial minority investor
- An investor holding less than half the shares, who does not want to run the company and mainly expects to sell at a higher price.
- Pre-money valuation
- What your company is worth today, before the new money arrives. An estimate, to be discussed with the investor.
- Holding company
- A company that does nothing itself: it owns shares in other companies.
- Personal guarantee
- You promise to pay yourself if the company cannot. Your house and savings can then be taken.
- Term sheet
- A short letter, before the contract, summarising the investor’s offer: amount, share, conditions.
- Investment fund (PE / VC)
- A fund that buys shares in companies for a few years, then sells them hoping for a gain.
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