Why startups shouldn’t use their investor’s company secretary

You’ve been pitching your startup for a few months now, and finally, an angel investor has agreed to invest in your company with the investment amount you needed. In the term sheet, the angel investor also requires you to change the company secretary to the investor’s corporate secretarial firm instead.

This is usually not a good idea.

So many times, I have seen entrepreneurs lose their companies after accepting investment from a particular angel investor.

Do your KYC on the angel investor

Before you even sign the term sheet, please make sure you know the investor well. When I say, see the investor I mean things like the investor’s characteristics in terms of his or her professional career life, previous investments and more importantly, his or her source of funds. More importantly, learn the differences between dumb money vs smart money.

Let’s say you have two investors to choose for your company. Investor A is offering to invest RM500,000 but has no experience in startups and made his wealth through a brick and mortar construction business. Investor B is a seasoned technology entrepreneur and has exited several startups before this and can also open doors, but he only offers you RM100,000 using his small micro fund. I don’t know about you, but I feel that it may be better to consider Investor B. Investor B can help you open more doors as has been in the startup ecosystem and know other investors or players that can help you grow and scale your startup.

But again, money is still money, whether dumb or otherwise. In this part of the world, there are so many tycoons and business owners with cash around. And some may not even come from legitimate sources like illicit activities. So you may have to make some tough decisions when you want to accept money from investors.

Angel investor’s company secretary is usually not your company secretary

The only reason why an investor wants you to use their company secretary is that they have developed a specific business relationship with each other. In other words, the company secretary may be more familiar with how the investor likes to get things done and so on. Additionally, this only means that the company secretary may even develop certain biases toward you. As usual, the investor may also be the one that will be funding and bankrolling the whole corporate transactions.

I know you may argue that corporate secretarial firms have specific duties and responsibilities to act following their roles as company secretary under the law. But company secretaries are human too. So they may or may not have specific prejudice and bias when it comes to the work they are instructed to do by the directors.

The problem may get worse if the investor’s preferred corporate secretarial firm has no zero or little experience in acting for startups. Whether you like it or not a startup has certain peculiarities that may not be the same as a brick and mortar business. A startup usually deals with a lot more transactions like coping with the capitalisation of assets like source code, vesting schedules and offering sweat equity to employees shares, valuation of intangible assets like source code and so on.

And your startup is just too crucial for you to leave it to chances.

So what do I do then?

It is better if you both can agree on a reputable corporate secretarial firm that is not “friendly” toward a specific party or shareholder. In other words, find someone who is independent and neutral. A company secretary plays a procedural role, but they are so important when it comes to effecting most important corporate exercises like fundraising, conducting board and shareholders meetings, etc. I have seen too many founders losing their companies because of individual unscrupulous corporate secretarial firms that deliberately ignore specific requests by the founders, and so on.

Can’t find the article covering the topic that you’re currently finding for your startup? I’m always figuring out new topics to write about on this blog. Feel free to drop me a note using the contact form, so that I know what to write about next time.