Informal Arrangements : 3rd party funds in exchange for equity

Published: 30/11/2022 By Hannah McCormack

Having options always makes any tough situation easier, we have therefore written this series of blogs on informal options to consider if your company is struggling financially, rather than going down the formal insolvency route. The last option is 3rd party funds in exchange for equity.

Funding to help a business does not have to always be done in the style of a loan with a view to repay it. A cash injection can be provided by a third party in exchange for equity in the company instead. Therefore, the company is not getting itself into more debt such as a loan from a bank or individual. With this type of funding the third party who provided the cash would own part of the company i.e. a shareholding.

Depending on what type of shares the third party acquire and the terms of the shareholder agreement, the third party could have rights to participate in any potential key decisions about the company. It is important to draw up a shareholder agreement that is beneficial to your company and not just the third party involved. We therefore suggest seeking professional advice regarding how the agreement should look as well as getting a professional service to draw up the agreement itself, ensuring both parties are happy with the new structure.  

All of our options are suggested in order to rescue a business that is struggling but has a long term potential for success. We are just at the end of a phone to talk through any of the informal and formal options in order for you to have all the information before you make a decision. Check out our informal arrangements page for all the options available.