Many businesses need investment to be able to develop their product, launch it to market or expand into new countries. The common route is to get an equity share or bank loan - but whilst these are readily available options, they are not without pitfalls and obstacles.
As a leading entrepreneur law firm we have worked with many companies, investors and financial groups looking for investment. This has given us a unique perspective on the risks and benefits of the different options available (from a legal and operational perspective).
Our view is that before entering into any form of investment negotiation businesses must be armed with all the facts and options and, at the same time, fully understand their own needs.
So what are the options available to you? Below we have outlined six that are in the market place:
- A specifically constructed Tax structure – SEIS/EIS where you offer equity shares, but often the motive of purchasing these are tax benefits for the investor rather than active control of the company. You can set the price, dividend payment schedule, buy back timeframe and under these structures the investor receives 50-30% tax back on the sums encouraging them to invest more.
It is advisable to apply to HMRC for advanced assurance to make sure your set up qualifies before you embark on the costs of setting this up. Whilst this may be an attractive option the rules are complex and it is important that you have a trusted accountant on board who is knowledgeable of the rules and updates. There are also restrictions on what companies qualify, the investor and what the money raised can be used for so you may end up disqualifying an investor if you are not careful and up to date.
- Bank Loan – Traditional means of generating money and cash flow for a business, but with rates at an all-time low this is even more attractive than before. Here you give no equity away and the interest repayments are often less than an investor expects, but without doubt founders will be required to give personal guarantees. Offering guarantees pierces the limited company protection you have so you must make sure you are fully aware of your liability and take advice. Often you are ‘jointly and severally liable’ meaning the bank doesn’t have to recover it’s money from all directors or in equal shares it can go after all or one of you for the entire debt.
- Corporate Bond – This is debt financing where you are not giving away equity, no personal guarantees are required, but you are offering up your businesses collateral as security. You can create a fixed term bond usually 3-5years where you agree a % payment each period payable to the investor. At the end of the period the capital is repaid or you can offer to convert this to shares or continue for a further period. The benefit is you set the rate and give away no control or share in your business, but you do need to have a repayment plan in place and maintain the interest payments, otherwise the collateral held in security will be sold. The costs of such a vehicle does mean this is something you would embark on only where you require over 5 million investment.
- Venture Capital or Angel investments – There are many portfolios of investment groups looking to invest in companies. The type of investor will depend on your needs as to whether you want an active leader for the company or a silent group of investors with money only. You will need to negotiate terms as these professional investors will want a good return and equity share and you need to understand fully their conditions – i.e What you will get from them in return? How do you get them out if it doesn’t work? Can you accept an offer to be bought out? Often these groups have a designated time period for a return of which you need to be fully aware. They can also charge around 7% or more for progressing the investment so you must be aware of these commissions. We have seen groups charging an ongoing annual sum together with the company having to pay high salaries of incoming executives who are appointed by the groups. This could end up being substantial sums.
- Crowdfunding - A concept that is taking off especially in the technology world. This raises finance through a large number of people investing small amounts, usually through the internet or now developed Apps. It involves three parties, the project owner seeking finance, the platform which acts as an intermediary and the investor. The purpose of the platforms is to match investors and projects together. This means no control is given away over your company, but you will have to pay a commission to the platform.
One possible downside of equity crowdfunding is that you suddenly may find yourself with a number of minority shareholders all of whom are owed duties by you and your company (or a nominee company operating in a similar way). This is a relatively new concept and yet largely untested. The growth of crowdfunding has taken place in a financial upturn so it is unclear how it will fare in a financial ‘downturn’. The procedures and policies in place for ‘investors’ may not stand the test of litigation should the spotlight be turned on these platforms as it was on the banks during the credit crunch.
- Immigration investment – The current position is that where a foreign national wants to relocate to the UK he can play an active role in developing a UK business for a visa. He must invest £200-250K into a UK company in return for a shareholding and nomination as a director. The company can use the monies for its expansion or product development the conditions, to be met here, include: employment of 2-3 employees over a 3-5 year period; maintaining payroll records and keeping the investor on as a director for his minimum term for visa requirements. For those wanting permanent leave in the UK quicker they can invest £2-5 Million into a qualifying investment which a corporate bond for a non-property related business can qualify.
Knowing all your investment options is the first step. The equally important second and third steps are “knowing which option is right for you” and understanding “how to win investment”.
Please contact us on 0207 426 0382 for more information.