By Oliver Woolley, Envestors
It pays to take your time putting together your offer and supporting documentation when setting out to raise capital. One mistake can mean the difference between a yes and no.
At Envestors, we’ve helped over 200 companies raise capital and so we know what it takes. We’ve compiled a list of everything you’ll need before you start your raise.
Clear investment offer
Have you clearly stated the offer of investment in terms of the share price (pre- money valuation), the fundraising spread (the minimum and maximum investment sought in this current round at the current share price) and the eligibility for tax relief
Insurance
Have you ensured adequate insurance is in place? This could include public liability, key person insurance and business interruption.
Shareholder protections
Have you allowed for key investor protections such as tag-along rights, pre-emption rights and voting rights in existing or proposed legal documents?
Investment legals
As a limited company, you will already have Articles, but you need to ensure there are adequate provisions for pre-emption rights and tag-along and drag-along rights. You will also need a lawyer to prepare a Subscription Agreement outlining the terms on which the investment is made, i.e. share price. You may also have a shareholder’s agreement, although this isn’t necessarily required.
Intellectual property (IP) ownership
Have you made sure all IP is owned by the company, as opposed to individual members of the management team?
Tax confirmation (S/EIS)
Can you provide HMRC correspondence or external advice showing that the company and proposed investment will qualify for tax relief under the S/EIS? Don’t try to process S/EIS forms yourself unless you have the relevant skills as it is so easy to get it wrong.
Key agreements
Have you made available key agreements, such as lease agreements, key supplier and customer contracts, insurance, contracts of employment etc. in an accessible, but secure data room?
Disclosure of legal proceedings
Have you confirmed there are no disputes with suppliers, customers, employees or anyone else? If there are, it is best to flag them early to avoid problems in due diligence.
Cap Table
Have you produced an up-to-date list of shareholders disclosing all interests in the company, including options and convertibles? Investors will want to understand who owns the company.
Balance Sheet
Do you have a recent balance sheet (less than three months old) that has been produced by someone with a suitable accounting qualification?
Recent financial statements
You must be prepared to share recent, actual management accounts (profit and loss, cashflow and balance sheet) with those looking to invest via a secure data room (to protect confidentiality). If the funding takes longer than expected, say three months from inception, provide updates.
Further funding rounds
Are you planning further funding rounds in the future? If so, it is helpful to set out the timing, amount and terms.
Solvency
You will be expected to show the financial position of your company in terms of its net current assets and your ability to pay your debts. A company is technically insolvent when it can’t pay its bills as they become due, or it has more liabilities than assets on its balance sheet. This isn’t the end of the world but needs disclosing. If you are having serious difficulties and need investment to get you out of a hole, you may be better off speaking to your accountant or a business recovery advisor with a view to restructuring the company before approaching investors.
Full disclosure of directors
Can you confirm that there is no risk of any conflict of interest in terms of involvement with an associated business which could be a distraction? Investors expect the key members of the management team to be wholly and exclusively working for the company in which they have invested.
Directors’ salaries and terms
Have you and your fellow directors signed a contract of employment or service agreement disclosing terms (including pay and non-compete)? Investors will want to know they are fair and reasonable. Typically, Founder/CEO salaries should be under £45,000 for start-ups and under £90,000 for established growth companies. The main aim is to achieve capital growth for the team and investors, so interests are wholly aligned.
Share options
Is there an Employee Share Option Plan (ESOP) to incentivise new and existing key members of the team who are not already shareholders? This could be under the UK tax-efficient Enterprise Management Incentive (EMI) Scheme.
Directors’ loans
Many founders put money into their business initially in the form of a directors’ loan. You must disclose this fact and explain how the loan is to be treated following investments, since, technically, investors’ funds could be used to repay the loans immediately and not be used to grow the business.
Corporate governance
Is there, or have you plans to put in place, an independent chair or independent non-executive director ensuring the business is being run responsibly? A good non-executive board (i.e. individuals not involved in the day-to-date running of the company) can support the executive team and help steer the business to success.
With such a high percentage of investment offers failing to raise finance, you need to make sure you are fully “investment ready” in order to close the deal. Sorting out the matters above will significantly increase your chances of raising investment as well as making it happen much more quickly.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
Web: https://www.envestors.co.uk/
LinkedIn: https://www.linkedin.com/company/envestors-llp/
Twitter: @EnvestorsLondon