Impact Start-ups Vs. Impact Investors: Legal Considerations for Early-Stage Investment


For any start-up, offering up equity in the company is a difficult decision as you are diluting your ownership and control. For impact start-ups, however, there is an extra layer involved, because your social mission may conflict with the profit-making intentions of an outside investor. Conversely, if you’re an impact or sustainable investor, you will want to make sure that the start-up you’re investing in meets its commitments; whether financial or social. Both investors and founders should therefore consider their objectives prior to any negotiations taking place.

Even when you have a good, trusting relationship, impact goals that investors and founders agree upon are unlikely to be met if they are not formalized. In this article, we will therefore present some impact-focused legal provisions available to impact investors and impact start-ups to integrate into their contracts. Unfortunately, there is no ‘one size fits all’ in this regard. A sustainability-oriented investor will likely want to include different provisions than an impact investor focused on diversity & inclusion. 

Legal Documents Involved in Raising Investment

Across jurisdictions, you will find that there are three main documents relevant for early-stage investment. Depending on the circumstances there may be additional forms and documents, but for the purpose of this article, we consider the term sheet, the shareholders’ agreement, and the articles of association the most fundamental to the investment relationship.

The term sheet is a short document setting out the main legal and commercial terms of the forthcoming relationship. Here, founders can highlight their mission and values beyond the financial terms. Likewise, impact investors can use the term sheet to specify their social requirements for the start-up. The shareholders’ agreement is a private agreement between the current shareholders in a business. It sets out the key investor protections and founder obligations. Finally, the articles of association are compiled in a public document which sets out the main rights and restrictions when it comes to shares, regardless of who currently owns the shares.

Integrating a Social/Environmental Mission into Investment Agreements

For both founders and investors, defining the kind and level of impact is a crucial start to be made. This will set clear expectations for the negotiations.

For founders

  1. Reverse Diligence. Founders can conduct their own due diligence on potential investors. Although you may not have the luxury of doing so, this may help to establish whether the investor has experience with ESG practices, or whether they have any quantifiable data demonstrating their commitment to impact. This will not be an alternative to legal provisions, but it might help you understand your position in negotiations.
  2. Selling Restrictions. Even when your incoming investor is equally as concerned as you about preserving your mission, they will also be looking to make a profit. One way in which they are able to do so is by eventually selling their shares. Consider setting restrictions on who these shares can be sold to, for example by requiring incoming buyers to subscribe to an agreement containing impact preservation provisions.
  3. Share Structure. Consider changing your share structure to accommodate impact investors. We suggest creating a separate share class for mission-aligned investors and founders. These shares should carry a heavier weight – which will probably be reflected in the pricing of the shares.

For investors

  1. Due Diligence. The first step in getting to know a business you are considering for investment is to conduct an impact analysis. Depending on the impact mission of the company, you will need to use different metrics and analytics. Beyond scrutinizing the impact mission, you should also look into how sustainable, ethical, and human rights friendly the company is, even if any of these aspects is not expressly included in the company’s mission.
  2. Reporting & Requirements. A common strategy for impact investors is to increase their information rights with a company. Through the shareholders’ agreement, for instance, you can contractually arrange for more reporting on impact, or any specific areas such as sustainability, inclusion, and/or human rights. Reporting by the board of directors of a company to the shareholders is very standard, although traditionally this concerns the financial metrics, rather than social/environmental ones.
  3. Board Participation: Ensure that you are entitled to either serve as a board member yourself or that you can appoint someone to do so. This will ensure that your impact goals are directly incorporated into the management of the company on a day-to-day basis.
  4. Exit Strategy. Similar to the ‘Selling Restrictions’ section for founders, investors who want to preserve the company’s mission after they leave should consider their exit strategy. The most straightforward solution is to only sell to value-aligned buyers. In order to do so, you can highlight the impact orientation of the company in an information memo to filter for buyers interested in the impact mission. Alternatively, you may contractually agree with a buyer to keep certain impact measures or committees in place after acquisition.