Use of Funds - Private Equity

In private equity deals, investors would like their investment to be used for business of the company and usually do not like it to be used for reimbursement of pending founders’ salaries or repayment of loans and the like.

Shareholders agreement typically has a clause on ‘Use of Funds’, which describes the use of the investment amount.  This clause may reference the business plan presented to investors or to the budget / business plan which is approved at the board meeting annually. 

The use of funds could be towards capital expenses or working capital. However, any expense beyond the budgeted numbers would perhaps need the investor’s prior approval or the list of Reserved Matters (we discussed about Reserved Matters here http://novojuris.com/2013/09/12/negotiating-termsheets-board-representation-part-3/) may provide for some hard numbers beyond which it requires the investor’s approval.

Founders while bootstrapping would have invested money into the company which

  • May get capitalized, but be wary that the shareholding percentage to the total capital might still remain the same.
  • The company may reimburse from the profits earned by the company over a period of time, however, the money may not earn interest.
  • The investors may be willing to repay / reimburse the amount in full/or in part. The founders have to ask for the same, around the time of signing up the termsheet.

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