I advise thousands of businesses getting ready to start, scale and seek investment right up until they exit or sell . It is never easy and there are always ups and downs, but the market is vibrant right now; investors are keen to enter the UK market and female founders are seeing more active interest than ever before.
The Alison Rose Review of Female Entrepreneurship published in March 2019, highlighted that up to £250 billion of new value could be added to the UK economy if women started and scaled up new businesses at the same rate as men
Fundraising for many businesses is vital so being prepared is likewise the key. No more so than for start-up technology companies who burn through a considerable amount of money, especially when pre-revenue. This article examines some of the key legal considerations when trying to raise capital for your business.
Over the years we have seen many different businesses turn to equity financing without exploring the different options which may be available. For many it is seen as the easy option, but this is not necessarily the case. With equity financing you are giving away a share in your business and welcoming in a new stakeholder who has legal rights and to whom you owe legal responsibilities.
Founders often neglect to explore other financing options, which can be used simultaneously or as an alternative : such as debt financing ( where you do not give up a share of your business) these can be with high street or commercial lenders which are displaying commercial rates presently or maybe you qualify for grants (essentially free money) as the UK offers many. Businesses should also consider whether there is R&D relief available which can result in a cash payment based on funds you have spent on R&D. In addition founders should explore whether there is any Covid-19 support available to them or low interest debt options.
Founders should be mindful that equity is not the only possibility and may not be the best fit for their business. We hear often ‘women calculate to the last pound so are meticulous , but they never ask for enough’ . This means banks may like the clear accounts and be more favourable or investors thinking its not a big enough investment for them. It’s a juggling act depending on who the pitch/proposal goes to. Backing up the request is essential, but asking for more than you need for plan B can also been seen as more attractive and understood practice and founders are reminded to push forward.
It is important that you look carefully at your business and company from the perspective of any potential investor. As part of any investment process you can expect a degree of due diligence. This often takes the form of legal, financial and commercial due diligence. The extent and volume of due diligence does depend on the amount being invested. It is however important to try and identify swiftly potential areas of concern. So take a look in the mirror and be prepared with concise , executed documents, answers to their tough questions and don’t forget above all to impress upon them your unique selling features , experience and passion.
Areas of legal due diligence can be summarised as being able to respond and address the following key areas:
– do you have signed and suitable contracts with all members of staff employed or otherwise. These have suitable confidentiality clauses; protects the businesses intellectual property and holds suitable restrictive covenants?;
– do you have signed contracts or valid terms and conditions with all customers and also your suppliers?
– do you have an agreement regulating the founders, a shareholders agreement is essential for any business ?
– have all shares been properly allotted and transferred?
– have you filed everything at Companies House that should have been filed?
– has someone been promised something from the business , such as shares, which isn’t in writing or reflected at Companies House?
– is there any dispute or litigation or investigation or any risk of the same?
– who owns the intellectual property of the business and how can you prove this?
– have you got any consent or license or regulation you need to sell your product or service?
– have you got a commercial property? Have you got a commercial lease in place or agreement to use the space?
– have you considered Data Protection carefully ?
– have you registered and protected your IP?
This is just a taste of the legal questions and documents that could be requested from you , that should be carefully audited; updated and executed to protect the business
So often founders neglects to consider whether the potential investor is a good or suitable fit for the business. We would encourage all founders to carry out their own level of due diligence on any potential investor. By selling shares in your business to someone you are creating legal rights and obligations to that shareholder. With any business there are the inevitable hard times and difficult conversations. Having a suitable investor who is a good fit for your business makes those conversations a bit easier. It doesn’t dilute your obligation or legal duties not to unfairly prejudice them or act in breach of your fiduciary duties but it may make it a bit easier to address and remedy.
Do they understand your business or products ; could you ask them for assistance to scale or additional monies if necessary ; do they have the qualifications , experience or contacts they profess and what do they want from you?
There are many different types of investors and each fit different types and scales of businesses. Depending on the size and stage of the business this may be venture capital, private equity, angel investors, trade investors or friends and family.
Some of the due diligence you should be doing on any potential investor and questions you should be asking are:
– what are the investors exit plans? Are they aligned to yours?
– what is their and your expectations of a return?
– what other companies are in the investor’s portfolio
-what is the length of the fund?
– what is the impact or sector of the fund?
– how involved does the investor want to be?
– how experienced if the investor?
– do they benefit from EIS have you considered this ?
– what demands are they making ?
The documents you can expect to receive as part of an investment round is:
You may also receive updated service agreements (employment contracts) for the founders governing their role in the business and usually include provisions on payment and expectations on services.
The legal documents for an investment round can be intimidating, these are usually lengthy and typically contain complex terminology. What is vital, however, for any founder is to ensure that the documents work for them and fit their business. The agreements are worthless if they are unrealistic for the business.
A founder should familiarise themselves with each and every clause and be confident that they understand exactly what they are agreeing and the impact on them and the business.
Often , we are confronted by Investors, or their representatives trying to negotiate a provision as ‘standard’. Never forget that this is your business and you can always attempt to negotiate any and all terms and restrictions. Sometimes you never know the investor may be hiding behind something being ‘standard’ because they don’t know themselves what the clause is saying or the impact of the same.
It is often daunting to go through an investment round, there is new and complex terminology and it usually a stressful period as ultimately your business needs the funding to be able to continue. We understand this and work closely with founders taking on investment to ensure that they fully understand what they are agreeing and the impact on them and their business.
Analysis of this data reveals that women-led businesses are as likely as male-led businesses to receive the finance, so its not the unwillingness of VC’s to invest , but more a lower number of applications and pitches made or for a lower value.
UK VC & Female Founders report, commissioned by Chancellor Philip Hammond at Budget 2017 and undertaken by the British Business Bank in partnership found
One would hope things have changed , but data showed in 2020 of the £12bn of UK VC investment invested, companies with an all-female founder team would have received just £120.1m. Mixed-gender teams would have seen £1.and all-male counterparts, just shy of £10.7bn. This again though we fear if more about applications rather than decisions. A report on acceptance / rejection would be interesting but not easily put into context, but essentially female founders securing investment is increasing but still far apart from that taken up by all male founder businesses and the question should be why are there less female founders seeking investment ?
Are there less in general ? Do they prefer to self-fund and consider debt financing ? or Are they being rejected . Whatever the reason we need to encourage and support all businesses to scale up and become successful and particularly entice female founders into the investment ring.
About the authorHot shot solicitor Karen Holden launched A City Law Firm in 2009 after growing concerned about the impact pregnancy would have on her career at an international law firm.
The company are now the go-to legal experts for entrepreneurs and they have won several prestigious accolades including Most Innovative Law Firm of the Year 2016. Karen has also been shortlisted for Working Mums Champion this year by WorkingMums.
Karen’s drive to succeed stems from being raised on a tough council estate in Wales, where her her mum worked three jobs as a single parent. Desperate for a better life, Karen managed to secure a scholarship to study at Cambridge before qualifying as a solicitor.
