Many businesses require funding and/or investment at some stage to be able to launch or scale-up. The common route is equity share and whilst readily available these are not without pitfalls and obstacles.
Working with many different companies, investors and financial groups has given us an insight into the options available for companies, the risk and benefits of each option and not just from a legal perspective but a practical and operational one. The business should consider all options: debt financing, crowd funding, grants, tax structures and equity investment although they are not mutually exclusive and all avenues should be explored carefully. It’s advisable to seek advice early and stay away from templates and online offerings that , whilst cheap, can hurt you in the long-run.
What should you be asking yourself before seeking investment?
Firstly, you and your founders must decide on whether to give away equity and if so how much control are you willing/able to transfer to be able to continue operating your business on a day-to-day basis. There are situations where the founders of a business who invested years of their life into the company, are voted out by investors or driven out due to change.
Agree now with your co-founders on the type of investment vehicle you wish to choose which will depend on whether your objective is to grow and manage the business or package this for an imminent sale. Ultimately, investors want to know how they will get a return on their investment, make it clear within your business plan what your exit strategy is also. Make sure all your documents mirror your goals, that you are all building from this agreed platform, but it can be revised as you grow and change.
How do you secure this investment?
- Have your house in order (Pre-Due Diligence): An investor will want to see clear and maintained accounts that the shareholdings are correctly registered at Companies House and you are up to date with filings, tax returns and all financial mechanisms. They will be impressed if you offer them a set of professional legal documents such as the following, which needs to be in place, up to date, relevant and executed:
- Co-founders/shareholders/partnership agreement to adequately and concisely address all relevant issues so that an investor trusts the business is secure and you are all agreeable to the plan. This is also security for the founders;
- Ownership and protection of all the business IP should be adequately documented and assigned fully to the business as this will be an asset the investor will want to benefit from;
iii. Contracts with suppliers and customers to protect cash flow; cancellation and your confidential data;
- A clear GDPR audit assessment and policy to satisfy the investors of your compliance;
- Any regulatory requirements or registrations must be in place and documented ready for presentation;
- Clear employment or consultancy contracts, along with policies and procedures and IR35 considerations noted;
vii. Insurance – an investor will want to make sure all cover is adequate and in place
viii. Do your articles mirror your operational needs , structure and agreements.
- A credible business plan: Investors want to know you have a passionate/experienced team, what your product/service is, what problem you are solving, how it’s performing and how it is to be marketed. They also want to know that they will generate a return & that you have a risk management strategy.
- Be prepared: Be confident in your proposal, be clear on your objectives and requirements and anticipate likely questions as it’s important the investor aligns with this as much as you fulfil his objectives.
- Understand your market: Ensure you can demonstrate a knowledge of the market that your product/service is in and concisely communicate this to your investors. Investors will be holding confidence in you that you know your competitors and know how you will respond to competition to put your business ahead.
- Be informed: Understand all available options; take time out for adequate advice and ask questions, take calculated risks, but negotiate for your needs. You can seek SEIS/EIS; claim your R & D tax credits, take on debt financing as well as equity investment spreading the risk will make you attractive.
Seek legal advice and guidance
Whilst it is easier, cheaper and faster to use template documents online than to consult with a solicitor, there are potential drawbacks to this. By meeting with a solicitor, they will take the time to understand you and your business, as well as your short and long-term goals and therefore draft bespoke documents to fit around your requirements. A solicitor can update and adapt your documents as your business evolves and if a dispute arises, for example, these documents will be scrutinised and used to challenge you. Any gaps or weaknesses not known until then could cause serious issues for you down the line. Remember you are paying for their support , advice and commerciality not just a document and with years of experience ACLF can help take your business to an investor confident of what you are presenting to them.
Securing investment, don’t get pressured into the wrong decision.
Meet different advisors, explore all options and be comfortable to go on the journey with the right people who can support you and who you trust (unless it is just passive investment) . Having the right people on board is essential as you grow. This also comes down to having the right advice on board at the early stages be it a lawyer or accountant or otherwise; they must understand you and your business, what your objectives and goals are and work with you to achieve that aim. A good accountant could save you thousands of pounds if you structure your business or the deal correctly and a good lawyer prevents a dispute that could later be the downfall of your business or the loss of your confidential information.
Our advice is that you do all of your research, ensure your legal documents are carefully audited, you obtain good advice to structure the deal and you do not compromise throughout. Our firm has taken many clients through small and large deals and understands the sensitivity and commerciality required and will be there to take our clients through the process ensuring they are fully aware of the risks.
Is your business launching or scaling-up, looking for funding or investment opportunities. Meet the A City Law Firm team at the Business Funding Show ’20 who will legally prepare you; efficiently structure your business; protect you as founders & your IP; advise on employee incentive schemes and options. Learn more about the BFS ’20 and grab your tickets here: https://bit.ly/38ejtF8
Written by: ACLF