How sports clubs are investing into tech start-upsSusie Jarrold
In recent years, athletes have increasingly been using their cash and kudos to invest in, and help promote, start-up companies. Interestingly, clubs are now increasingly becoming investors too, with a particular focus on the tech industry. Barcelona recently announced that they are looking to raise €100m to launch their own investment fund for new sports technologies and many others are exploring similar opportunities to diversify their income1.
Fledgling businesses are coming up with more and more innovative sports tech products and solutions that enhance participation in, and viewing of, sports. They might range from "get fit" apps and data analytical tools to wearable gadgets and virtual/augmented reality solutions. There are natural synergies between these products and a club’s business, and as a result these tech start-ups are becoming increasingly attractive to clubs looking for investment opportunities and/or to get an advantage over their competitors, whether on or off the pitch.
So, if you’re in-house at a club and your CEO needs you to support an investment, or if you're a sports tech entrepreneur looking for investment, where do you start? This article takes a high-level look at the different stages of equity investment in private UK companies and the key considerations and documents involved.
Stages of investment
Seed investment: at this early stage, investments generally total less than £1,000,000 and are traditionally sought by start-ups looking to fund the initial development of their product. Investments of this nature are often funded by family or friends of the founders or angel investors (private individuals looking to make personal investments).
Series A, B (etc.) investments: following the seed investment, a company may look to raise further funds to market its product and expand its business. This may occur over a number of series at different points in time. The sums involved will generally be larger than for seed investments and possible suitors include private equity houses, venture capital, family funds and strategic investors, such as a sports club.
How much equity?
Clearly, an investor wants its investment to be worthwhile, but a founder does not want to give away too much equity, particularly in the early stages (given that the founder’s shareholding will become more diluted with each round of investment). This is where the valuation of the company comes in. In a very straightforward scenario, if the "pre-money" (i.e. pre-investment) value of a business with one founder/owner is set at £9,000,000 and an investor is going to put in £1,000,000, this makes the "post-money" valuation £10,000,000. The investment amount represents 10% of the overall post-money valuation so this is the shareholding the investor would expect, and the founder would be diluted to 90%. This can be complicated if the founder has, for example, promised future shares to employees, so it is always important to consider the full picture (i.e. the fully diluted share capital after exercise of any options or warrants).
Term Sheet: once a company has found a potential investor, the next stage is to agree a term sheet setting out the proposed investment in more detail. Whilst generally not legally binding, a term sheet may contain some enforceable provisions, particularly around confidentiality.
Articles of association: this publicly available document contains the constitutional rules of a company and sets out, among other things, rights attaching to shares. An investor may require preferential share rights (as regards voting, dividends and/or on a sale or liquidation) and as such, may require a separate class of share. Other examples of common provisions include restrictions on share transfers, protection against dilution of existing shareholdings and special share rights designed to incentivise manager shareholders.
Investment agreement: this private document sets out the terms of the investment and dictates the contractual relationship between the company, the investors and its existing shareholders. It may contain specific rights for the investor, such as information rights, the right to be appointed as a director (or at least attend board meetings as an observer) and requirements for investor consent to be obtained before the company can do certain things that could affect the value of the investment.
The following are some other things to bear in mind:
An investor may want to undertake legal/financial due diligence before committing to an investment. For instance, in the context of a sports technology company, an investing club will want to ensure the company has full ownership of the intellectual property rights in respect of its products. The process will require the company to provide information and documentation to the investor’s advisors (so confidentiality terms should be considered).
Approvals may be required before the investment can take place, perhaps from existing shareholders (under the terms of the articles of association or an existing investment or shareholders’ agreement) or a lender.
While money is clearly the focus of most investment deals, a club’s backing can give a sports-tech company significant non-financial advantages. The marketing benefits of being associated with a club is something sponsors will pay princely sums for, and the club, as a sophisticated user of the tech, can provide incredibly valuable early input in the development stages. As such, an investment by a sports club is likely to be valued on all these elements, not just the cash injection. It will be important for the legal documentation to address the parameters of how the club will contribute in these ways, and agreements dealing with service provision and sponsorship/marketing issues, for example, will need to be considered.
This article has been republished with the permission of Lewis Silkin.
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About the Author
Senior Associate, Lewis Silkin
I am Senior Associate in the Corporate, Commercial and Partnerships Legal Practice Groups.
I studied International Management and French at the University of Bath, spending the placement year of my degree working for an international company based in the south of France. I then completed my GDL and LPC before joining Lewis Silkin in 2011 to complete my training contract.
In my spare time I enjoy travelling, playing various sports and supporting the Welsh rugby team and Arsenal FC.
I advise both companies and individuals on a variety of corporate matters, including:
- company incorporations and corporate governance issues
- group reorganisations
- share and asset sales and acquisitions
- refinancing exercises
- Advertising & Marketing
I have particular experience of working with clients in the advertising, marketing and PR sectors and since qualification I have acted on a number of transactions for clients in this sphere, including a large group reorganisation for a high-profile creative agency and a number of UK and international acquisitions and disposals.
Throughout my time with the firm, both as a trainee and since qualification, I have worked with a variety of sports clients, including rugby and football clubs, players and agents. My work in this sector includes providing corporate, finance and regulatory advice. Most recently I have been involved with providing ongoing assistance to a football club with their financing arrangements and corporate governance.
I have always had a keen interest in sport and having played football for a number of years, including for Wales at junior level, I now head up the Lewis Silkin 5-a-side team.