"The investor is putting RM1 million into the company. Who is actually receiving the money?"

A founder agrees to give an investor a 20% interest in the business for RM1 million.

The founder believes the investment will provide the company with fresh working capital. The investor believes that he is purchasing part of the founder’s existing shareholding.

Both parties agree on the same figures:

RM1 million for 20%.

Yet they are describing two fundamentally different transactions.

If the company issues new shares to the investor, the RM1 million is paid to the company.

If the investor purchases existing shares from the founder, the money is paid to the founder. The company may receive nothing.

Before debating valuation or investor rights, the parties must first answer a basic question:

Is this a share subscription or a share sale?

1. A share subscription brings new capital into the company

In a share subscription, the company issues new shares to the investor.

The investor pays the subscription amount to the company, and the company may use the funds for the agreed business purposes.

Because new shares are created, the percentage held by existing shareholders will be diluted.

Suppose the founder initially holds 1,000 shares, representing 100% of the company. If enough new shares are issued to give the investor 20% after completion, the founder’s interest will reduce to 80%.

The founder has not sold any of his original shares. His percentage has changed because the company’s total issued shares have increased.

The Companies Act 2016 contains requirements governing the directors’ power to allot shares, the necessary company approval and, subject to the constitution, pre-emptive rights of existing shareholders when new shares ranking equally are issued.

The required approvals and any waiver of existing shareholders’ rights should be addressed before the subscription is completed.

2. A share sale pays the existing shareholder

In a share sale, the investor buys shares that already belong to a shareholder.

No new shares are created.

If the founder sells 20% of the existing shares for RM1 million, the payment ordinarily goes to the founder as the seller.

The company’s share capital does not increase, and the company does not automatically receive funds for expansion.

This may be appropriate where the founder wants to realise part of the value created over the years.

It is not appropriate if everyone assumes that the full RM1 million will be available to employ staff, purchase equipment or finance the company’s operations.

The transaction documents must identify who is selling, who is subscribing and where every part of the consideration will be paid.

3. A transaction can contain both elements

The parties may agree on a mixed structure.

For example, an investor may pay RM1 million as follows:-

• RM700,000 to subscribe for new shares in the company; and

• RM300,000 to purchase some of the founder’s existing shares.

The company receives RM700,000 in new capital. The founder receives RM300,000 personally.

This allows the founder to realise part of his investment while ensuring that most of the funds remain available to grow the business.

However, the resulting ownership percentage must be calculated carefully. The number of new shares, shares sold by the founder and total issued shares after completion should be set out in a clear capitalisation table.

Words such as “20% equity” are not enough.

4. Is the valuation pre-money or post-money?

Assume an investor agrees to invest RM1 million for 20% of the company after the investment.

If RM1 million represents 20% of the post-investment value, the implied post-money valuation is RM5 million. The corresponding pre-money valuation is RM4 million.

However, parties sometimes negotiate “RM1 million for 20%” without stating whether the percentage is calculated before or after new shares are issued.

They may also fail to account for:-

• options promised to employees;

• convertible loans;

• shares to be issued to another investor;

• different classes of shares; or

• partly completed earlier investments.

The agreed valuation should be translated into a precise number and class of shares.

The documents should include the company’s capitalisation immediately before and immediately after completion.

5. Twenty per cent of the shares does not explain all the investor’s rights

The economic and management rights attached to the investment matter as much as the percentage.

The investor may request:-

• a seat on the board;

• access to financial and operational information;

• approval rights over major decisions;

• protection against the issue of further shares;

• priority over certain distributions;

• restrictions on the founder transferring shares;

• a right to participate in future fundraising;

• tag-along rights if the founder sells;

• drag-along rights in a future sale; or

• a defined exit mechanism.

A founder may retain 80% of the shares but still require the investor’s approval before borrowing money, changing the business, issuing shares or disposing of major assets.

Conversely, an investor holding 20% without properly documented rights may have limited influence over management.

Ownership percentage and decision-making control are related, but they are not identical.

6. What class of shares will the investor receive?

An investor may subscribe for ordinary shares or a separate class carrying negotiated rights.

Those rights may relate to:-

• voting;

• dividends;

• repayment of capital;

• conversion;

• redemption; and

• priority when the company is sold or wound up.

The parties should not use labels such as “preference shares” without setting out their actual legal and economic rights.

If different classes of shares are created, the company’s constitution may need to be adopted or amended to reflect those rights.

The subscription agreement, shareholders’ agreement and constitution should be consistent. A right found only in a private agreement may not operate in the same manner as a right properly attached to a class of shares.

7. What happens to the existing shareholders’ rights?

Before issuing new shares, the company must review its constitution and shareholders’ agreement.

Existing shareholders may have a right to be offered the new shares first so that they can maintain their relative ownership.

If an outside investor is to receive the shares, the existing shareholders may need to decline or waive those rights through the proper process.

Earlier investment documents may also restrict:-

• the issue price;

• the creation of a new class;

• changes to voting rights;

• appointment of directors; or

• transactions that dilute an existing investor.

Ignoring these documents can turn a new fundraising exercise into a dispute with existing shareholders.

8. When should the investor pay?

The company may want the full investment immediately. The investor may prefer payment in stages.

A subscription can be made conditional upon matters such as:-

• satisfactory legal and financial due diligence;

• approval of the investment by the board and shareholders;

• amendment of the constitution;

• execution of the shareholders’ agreement;

• transfer of intellectual property to the company;

• settlement of related-party balances;

• renewal of important licences;

• execution of key employment contracts; or

• achievement of agreed business milestones.

If funding is released in tranches, the documents should state what must occur before each tranche and what happens if a milestone is not achieved.

The company should not commit to expenditure based on the headline investment amount without understanding the drawdown conditions.

9. Can the company use the money for any purpose?

An investor may agree to fund expansion based on a specific business plan.

The subscription agreement may restrict the use of proceeds to matters such as:-

• hiring employees;

• product development;

• purchasing equipment;

• opening new branches;

• marketing; or

• repaying identified liabilities.

The founder may require investor approval before using the funds for another purpose.

Particular attention should be given to payments to founders and related parties. If part of the investment will repay a founder’s loan, acquire an asset belonging to the founder or pay outstanding remuneration, that use should be disclosed.

An investor expecting all funds to support future growth may object if a substantial amount is withdrawn shortly after completion.

10. What is the investor relying upon when investing?

The investor may be relying on statements concerning the company’s revenue, customers, assets, technology, licences and liabilities.

These matters may be addressed through due diligence, warranties and disclosures.

The company and founders may be asked to confirm, among other things, that:-

• the corporate records are accurate;

• the shares have been validly issued;

• financial information is not misleading;

• material contracts remain effective;

• intellectual property belongs to the company;

• there is no undisclosed litigation;

• taxes and statutory payments have been addressed; and

• all material liabilities have been disclosed.

Founders should not sign broad warranties without checking whether the company can support them.

If an exception exists, it should be properly disclosed and, where necessary, resolved before completion.

11. Does the founder have to remain with the company?

Many investors are not investing only in the company’s current assets. They are also investing in the founder’s experience, relationships and ability to grow the business.

The investor may therefore require the founder to:-

• remain employed for a minimum period;

• devote sufficient time to the company;

• meet performance objectives;

• protect confidential information;

• assign relevant intellectual property;

• avoid diverting business opportunities; and

• accept consequences if he leaves early.

Founder vesting or good leaver and bad leaver provisions may also be proposed.

These provisions can significantly affect the founder’s ability to retain or realise the value of his shares. They should be negotiated carefully rather than accepted as standard investor terms.

12. How will the investor eventually exit?

An investment does not guarantee that the investor can sell the shares whenever funds are required.

A private company’s shares are not traded as readily as shares listed on a stock exchange.

The parties should discuss possible exit routes, including:-

• sale of the entire company;

• sale to another investor;

• a founder buy-back, where legally permissible;

• a permitted transfer to an affiliate;

• a future listing; or

• a negotiated exit after a specified period.

The shareholders’ agreement may include transfer restrictions, rights of first refusal, tag-along and drag-along provisions.

An exit clause should provide a process. It should not promise an outcome that the company or founder may be unable to deliver.

13. Completion requires more than transferring the money

At completion, the parties may need to coordinate:-

• receipt of the subscription or purchase consideration;

• board and shareholder resolutions;

• allotment or transfer of shares;

• stamping of transfer documents where applicable;

• entry of the investor in the register of members;

• issuance of share certificates, if requested;

• appointment of the investor’s director;

• adoption or amendment of the constitution;

• execution of the shareholders’ agreement; and

• statutory lodgements.

Under the Companies Act 2016, entry in the register of members is prima facie evidence of legal title to shares.

A payment receipt and signed term sheet do not replace the necessary corporate steps.

Before announcing that an investor owns 20% of the company, ensure that the transaction has actually been completed and recorded.

14. Ask where the money is going before negotiating what percentage it buys

A share subscription funds the company.

A share sale pays an existing shareholder.

A mixed transaction can achieve both purposes.

None is inherently wrong. The appropriate structure depends on what the company and founder are trying to achieve.

The problem begins when the parties agree on a price and percentage without agreeing on the transaction itself.

Before saying, “The investor is putting RM1 million into our company,” confirm:-

• who receives the RM1 million;

• how many shares will be issued or sold;

• the ownership after completion;

• what rights accompany those shares;

• how the funds may be used; and

• how the relationship will end.

Those details determine whether the investment strengthens the company or creates its next shareholder dispute.