Selecting the right lawyer and tax advisor for investment rounds

By Karen Holden

Choosing the right advisors specifically a solicitor and tax advisor for your investment round is essential firstly so you have the right support and advice, but also to ensure the legal documents are negotiated and tailored to be effective for you as a founder.

It is also key to understand the difference between ‘regulated’ advisors and those that are ‘lawyers, advisors and bookkeepers’ who are not necessarily insured or have the requisite experience you require.

In the UK anyone can use the word lawyer and legal, but it does not mean they are qualified, experienced, insured and regulated by the SRA the governing body in the UK. Regulated solicitors have professional insurance, they are regulated on the advice they give you and to look after your funds. Tax advisors are different to accountants who are different to bookkeepers as many will not have EIS/SEIS experience or are able to advise on global tax structures for example and yet the investment needs to be tax efficient for both you and the investors.

Why choose a solicitor to advise you rather than doing it yourself or using templates:

  1. Legal compliance: A knowledgeable lawyer can ensure that all legal requirements are met during the investment process, helping you avoid potential legal pitfalls in the future, ensuring compliance with UK regulations, but Moreso protecting you as founder.
  2. Tax efficiency: A skilled tax advisor can help structure the investment in a tax-efficient manner, potentially saving you money and maximising returns for both investors and your company. This is essential when taking money later out of the business or juggling grants and EIS as well as other tax incentives afforded by the government.
  3. Deal structuring: Lawyers and tax advisors can help negotiate and structure the terms of the investment deal to best suit your company’s needs while protecting your interests. The common issue can be larger investors diluting you, taking control of the shares or moving the company in the direction you don’t want so legal constraints to protect against this are key.
  4. Investor confidence: Having professionals that understand the business and the role they play in the process can instil confidence in potential investors, reassuring them that their investment is being handled by competent and trustworthy individuals. Reacting quickly and efficiently means the deal doesn’t stall and commercial relationships are maintained
  5. Risk management: Experienced advisors can identify and mitigate potential risks associated with the investment, safeguarding your company’s financial health and reputation.
  6. Business continuity: Whilst advisors run the due diligence and negotiations you can concentrate on running the business as an investment can take time and be distracting and the last thing you need is for the business to suffer

Overall, selecting the right professionals can greatly impact the success and sustainability of your investment round in the UK.

Why you should avoid templates

Using templates or unregulated experts during your investment round poses significant risks to your business. While templates may seem convenient and cost-effective, they often lack the specificity and customisation needed to address the unique complexities of your investment deal.

Moreover, relying on unregulated experts, who may not have the necessary qualifications or experience, can result in costly mistakes and legal liabilities and you cannot report them or claim money back from their insurance if something does go wrong.

By entrusting your investment round to professionals who specialise in the field, such as experienced lawyers and tax advisors, you can ensure that your interests are adequately protected, compliance requirements are met, and the deal is structured in a way that maximises benefits while minimising risks. Investing in expert guidance upfront can save you from potential headaches and financial losses down the line, making it a prudent choice for the long-term success of your business and protecting your own personal interests.

What should your lawyer be doing for you during an investment round, what is their role?

During an investment round, your lawyer plays a crucial role in safeguarding your interests and ensuring the smooth execution of the deal. However, this is your deal so you are in control and ultimately the commercial decision is yours!

Firstly, they should conduct thorough due diligence to identify any legal risks or issues that could impact the investment before this is submitted to the investor. So any reg flags are identified to you and resolved so your ready to address. This includes reviewing contracts, agreements, and corporate documents to ensure compliance with regulatory requirements, and checking your company filings and the data room.

Additionally, your lawyer will negotiate and draft the investment terms to protect your rights and ensure clarity for both parties involved. This will involve drawing battle lines, but then offering compromises that you agree to secure the deal.

They’ll also coordinate with other professionals, such as tax advisors and financial experts, to ensure the deal is structured in the most advantageous way possible. \This collaboration should be in your favour to ensure the structure makes this as profitable for the future as possible.

Throughout the process, your lawyer should provide strategic advice and guidance, addressing any concerns or questions you may have while representing your best interests at all times. It may also be they tell you to walk away if the deal is of concern.

Ultimately, their role is to mitigate risks, facilitate smooth transactions, and help you achieve your investment objectives effectively. Their role is not to tell you whether to proceed or not that’s commercially your decision, they do not dictate what you accept or don’t they present options and opinions for your informed decision.

How crucial is due diligence

Due diligence is absolutely crucial in any investment endeavour, serving as a comprehensive investigation and assessment process that helps investors make informed decisions and mitigate risks. It involves meticulously examining various aspects of a business, including its financial health, legal status, operational capabilities, market position, and potential risks. By conducting due diligence, investors can uncover any hidden issues or liabilities that could adversely affect the investment’s success or value. It provides investors with confidence in their investment decisions, helps identify opportunities for value creation or improvement, and ensures transparency and trust between the parties involved. So make sure you are prepared, the data room is full of reviewed, executed and updated documents.

Why should your lawyer negotiate with the investor

Your lawyer should negotiate with the investor on your behalf to ensure that the terms of the investment align with your best interests and objectives. Negotiation is a critical aspect of the investment process, as it determines the structure, conditions, and obligations of the deal. By having your lawyer negotiate, you benefit from their expertise in navigating complex legal and financial matters, as well as their ability to advocate for favourable terms on your behalf.

They can help identify potential pitfalls, protect your rights, and ensure that the agreement is fair and balanced and the argument is with the lawyers so you get to preserves your relationship with the incoming shareholders as this distance helps.

Moreover, having a skilled negotiator on your side can help establish a positive relationship with the investor while minimising the risk of misunderstandings or disputes in the future.

What are the essential factors to protect you as a founder during investment negotiations?

Protecting a founder during investment negotiations involves several essential factors:

  1. Clear understanding of terms: Ensure the founder understands the terms of the investment thoroughly, including valuation, ownership dilution, control rights, and exit options.
  2. Legal representative: Engage experienced legal advisors to represent your interests, review documents, and negotiate terms on your behalf.
  3. Protective provisions: Include protective provisions in the investment agreement to safeguard founder rights, such as board representation, drag-along and tag-along rights, and approval thresholds for major decisions.
  4. Anti-dilution protection: Negotiate for anti-dilution protection to prevent excessive ownership dilution in case of future financing rounds at lower valuations.
  5. Exit strategy: Discuss and agree on an exit strategy upfront to ensure alignment between the founder’s and investor’s expectations regarding potential liquidity events.
  6. Transparency and communication: Maintain open communication with investors and ensure transparency regarding the company’s performance, strategy, and decision-making processes.

By addressing these factors proactively, founders can protect their interests and ensure a fair and mutually beneficial outcome during investment negotiations.

About the author

Karen Holden is the founder of A City Law Firm an innovative firm working in emerging tech, but which offers personal service. She was admitted to the role in 2005 having obtained her degree in law and her Masters from the University of Cambridge and her LPC from the College of Law. She is an entrepreneur having developed a thriving corporate firm from scratch; establishing the female founder’s growth programme to help founders get investment ready and was the winner of the WeAreTheCity Champion award.

Karen was given freedom of the City for her work in equality and speaks at many venues including the House of Lords and tech hubs and universities on starting, scaling and selling your business.

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