Five Fundamentals of Fundraising

Posted Thursday 30th July 2020

So you have decided that you want to secure external funding. You have got a winning management team, a snappy pitch deck and an ironclad business plan – but have you thought about the legals? Set out below are five key considerations to get right before you bring an investor on board.

1. Advance Assurance – Seed Enterprise and Enterprise Investment Schemes (SEIS & EIS)

SEIS and EIS are Government schemes aimed at promoting investment into start up companies by granting investors generous tax breaks on their investments.

If your company qualifies for SEIS or EIS, this can make your investment opportunity much more appealing to potential investors.

After the investment has completed, the company will need to apply to HMRC to notify it that the company has issued shares to Investors wanting to make use of one of the schemes. There is always a risk that HMRC could refuse the application and the Investors will not get the tax benefits they were hoping for.

To help mitigate this risk, HMRC allow companies to apply for advance assurance whereby HMRC will agree that your proposed investment will meet the conditions of the SEIS and/or EIS scheme before the company completes the transaction. This provides comfort to the Investors that they are likely to get the tax benefits from the scheme when HMRC are notified of the investment after completion.

2. Know your Cap Table Inside Out

Investors will want to know exactly what percentage they are getting in the business for their investment on a “fully diluted basis”. This means the percentage the Investor would hold taking into account all of the company’s shares currently in issue, any advance subscription agreements you may have, any options it has granted to employees and/or advisors and any convertible loans or warrants, all of which will increase the existing share capital.

This information is set out in a Capitalisation Table (or Cap Table) so the Investor can clearly see the overview of the share structure of the company.

If you have offered options to advisors or are thinking about introducing a share option plan for your employees, it is useful to think about what percentage of the company’s share capital should be allocated before completing the investment  on so it can be included in your cap table and avoids having to negotiate this with the Investor at a later date.

3. Give Your Company a Legal Health Check

Investors will want to know that your company has all the right protections and agreements in place from a legal perspective and it is worth tidying up any loose ends before you start the investment process to not delay completion later on. Key considerations are:

  • Intellectual Property (IP) – does the company own all IP created or does any need to be assigned to it? Have consultants got agreements in place to assign IP to the Company for any work they carry out?
  • Service Agreements – do the founders have service agreements in place? If not, consider putting these in place before you speak to an Investor so that you do not have to negotiate the terms of the service agreement with them.
  • Advisor & Commercial Agreements – have the terms been properly documented in a legally binding contract?
  • Company Registers – does the company have its statutory registers prepared and up to date, in particular the register of members?

4. Know What You are Willing to Offer

Once you have an interested Investor the next stage will be to agree the Heads of Terms (or Term Sheet). This is a non-legally binding document (subject to a couple of provisions) which sets out the terms pursuant to which the Investor is willing to invest, which will then be covered in more detail in a shareholders agreement (or investment agreement) and articles of association.

Investors will usually ask for a range of provisions to protect their investment including restrictions on transferring or issuing further shares in the company, what happens to your shares if you leave the Company and financial and other information about the Company to be provided to them on a regular basis.  Take the time to understand what the requirements will mean for you and your Company and be pre-prepared in knowing what you are willing to accept and concede on.

5. Instruct Good Advisers

It is so important to have the right legal and financial advisers when seeking outside investment. Instructing lawyers early on to help with carrying out legal health checks, documenting agreements into legal contracts, getting the right service and IP agreements in place and applying for advance assurance in the run up to closing an investment can all help to create the right impression to the Investor and allows the investment process to run more smoothly. Your lawyers will also be drafting many (if not all) of the investment documents, negotiating the terms on your behalf as well as managing completion of the investment so you will be speaking to your lawyers on a daily basis as you get closer to completion. Do not underestimate the value in finding the right lawyer who has the necessary skills and experience to act for you and that you trust to guide you through the investment process.

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.

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