Many businesses require funding or investment at some stage, either to launch or scale-up. The common route is equity share. Whilst this is readily available, these are not without pitfalls or obstacles. Working with many different companies, investors and financial groups have given us an insight into the options available for companies, including the risks, and benefits of each option and not only from a legal perspective but also from a practical and operational standpoint. It is important for businesses to consider all the options: debt financing, crowdfunding, grants, tax structures, and equity investment because although they are not mutually exclusive, they should all be explored carefully.
What should you be asking yourself before seeking investment?
Firstly, you and your founders must decide on whether you are prepared to give away equity and, if so, how much control are you willing to transfer including what level of control you need to retain to be able to operate 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 of the company by investors or driven out due to change. Be careful to consider how involved you wish to remain.
You must value your business now and what you predict it to be worth before making any decisions on the level of equity/price you are willing to accept. This must be transparent and the workings sensible, otherwise you will immediately put off a savvy investor – back up what you say!
The decision on the type of investment vehicle you choose is dependent on whether the objective is to grow and manage the business or package this for an imminent sale. A longer-term aim is a completely different process to a short-term build and sell objective.
Ultimately, investors want to know how they will get a return. You should also make it clear within your business plan what your exit strategy is too.
– But, firstly, how do you secure this investment?
You need to have your house in order before Due diligence
An investor will want to see clear and maintained accounts (if applicable otherwise forecasts), that the shareholdings are correctly registered at company’s house and you are up to date with filings, tax returns, and all financial mechanisms.
We strongly recommend you keep all structures as simple as possible whilst looking to be tax efficient, to avoid over complexity or confusion. Legal documents also need to be in place and more importantly up to date, relevant and executed. Namely the following:
Protect your business – here’s how
A Co-founders agreement (Shareholder’s/Partnership Agreement) must be in place for the protection of the business, if there is more than one founder.
It must adequately and concisely address all relevant issues so that an investor trusts the business is secure, knows the founders are all in agreement with the potential transaction, is protected from over-involvement by minority investors and can know their goals are aligned with those of 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. This includes checking all third-party contracts to ensure IP has been legally assigned over.
There must also be adequate contracts in place with suppliers and customers so the investor knows you are a serious business and that it’s less likely any unexpected disputes can arise or that they cannot be resolved.
These contracts protect cash flow; cancellation and your confidential data so it’s evidence of your secure income.
Have you got a clear GDPR audit assessment and policy to satisfy the investors of your compliance? They will not want to inherit the risk of a claim or fine. Any regulatory requirements or registrations must be in place and documented ready for presentation.
Have you got clear employment or consultancy contracts in place along with policies and procedures?
Your staff are often your best asset, but more importantly, they hold your confidential and sensitive data, client lists and know how so an investor will want to ensure secure restrictive covenants and protection are in place.
- Insurance – the investor will want to make sure all cover is adequate and in place.
- Polices – depending on your business certain legalities are necessary such as Cyber Protection if in the advanced technology sector, employment/contractors’ policies specific to IP assignment and that your patent is lodged
Ensure you have a credible business plan
Investors are put off by long technical documents; they want to know you have a passionate/experienced team, what your product/service is, what problem you are solving, how its performing and how it is to be marketed.
Investors want to know that they will generate a return and that you have a risk management strategy.
Be prepared: be confident in your proposal, understand your business so you can address all the questions adequately, be clear on what it is you want and your objectives, as it’s as important the investor aligns with this as much as you fulfill his objectives.
Anticipate what they are likely to ask and think about certain scenarios. Make sure their potential questions will not expose flaws in your business strategy. If you don’t answer or you’re not transparent or you can’t back up your proposition the investor is likely to walk away.
Understand your market
Make sure 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 will want to know how you will respond to competition to put your business ahead.
There are too many incidents where people say they have no competition ‘no one is doing this out there ‘and then an investor points out examples. Avoid egg on your face and do your research.
Be informed: understand all the options available to you so you are not forced down a route you didn’t mean to go, take time out for adequate advice and do not be afraid to 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.
Securing investment, don’t get pressured into the wrong decision, and choose the right advisors for you…
Explore all the options and understand what is available and what each practically will mean for you.
What may appear too restrictive to a lawyer or accountant may still be worth the risk to your expansion, but also consider if you can discuss problems or concerns with them?
You need to be comfortable and go on the journey with the right people who can support you and who you trust unless it is just passive investment. It’s always very difficult to turn down that dream cheque but 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, as they must understand you, your business and your objectives to work with you to support and achieve your goals.
It is important that your advisors are not ‘yes-men’, do not sit on the fence or adopt a commercial approach, allowing you to lead the way with them nodding heads.
Finding advisors that do not have their own agenda and are willing to help you go in the direction you choose is absolutely key at the early stages and as you progress through your journey.
A good accountant is worth a thousand searches
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.
It is imperative that they work with you as part of the team Our advice when seeking investment is that you do all of your research and are fully prepared for the process.
Your legal documents must be carefully audited, and the gaps filled in, you have advisors in place 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 required as well as the commerciality.
Often a founder’s decision may not mirror the legal advice provided but that lawyer should still be there taking their client through the process knowing they are fully aware of the risks.