Many businesses require funding or investmentat some stage, either to launch or scale-up. The common route is equity share. Whilst this is readily available, theseare 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 Cyberprotection 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 toknow 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.
Investorswant 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 questionswill 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 thatyour 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 yourresearch.
Be informed: understand all the options available to you so you are not forced down a route you didnt 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.
Karen Holden is an award-winning solicitor and founder of A City Law Firm (ACLF), the go-to lawyers for entrepreneurs, startups, scale-ups, those seeking investment. In addition to being very successful lawyers for businesses , ICOs and family law, ACLF are now the UK's leading LGBT law firm and surrogacy specialists. Karen is a regular media commentator, panellist and event speaker.