Creating and growing a startup is challenging; from creating an initial business proposition to building a team, founders have their work cut out. On top of this, new business owners need to raise capital so the business can grow.
If you’re a founder seeking equity investment, venture capital or angel investment, this article is for you. We’ll guide you through the steps needed to attract and secure funding and complete your first funding round, from preparing to pitch to getting your business investment ready. You’ll learn about the financial and legal issues involved, from equity dilution to shareholders’ agreements, so that you can approach your first funding round with confidence and avoid common pitfalls.
Contents:
- Plan of action
- Financials
- The value of your business
- Your tax position
- Cap table
- Cash flow forecast
- Legals
- IP asp ects
- Articles of association and shareholder agreements
- Non-Disclosure Agreements
- Commercial contracts
- Employment contracts
- Companies House filings
- Compliance and regulation
- Timely legal advice
- Legal assistance with your funding round
Plan of action
To execute a successful first funding round, you need to look at your business from the point of view of an investor; from the outside looking in. You’ll first need to understand what they’ll be looking for and familiarise yourself with key terms such as shareholder agreements, capitalisation tables and convertible notes. You will also need to be clear what you want to achieve from the round and be ready with a punchy pitch deck that demonstrates to investors why you’re a solid bet.
As a minimum, you’ll need to present a comprehensive business plan with detailed forecasts and growth projections, present a robust leadership team, and decide on the amount of funding you want and on what terms.
Financials
Having a solid handle on the financials is essential to securing your first round of funding. A failure to appreciate the financial consequences of a potential investment deal can be serious, from a loss of control over the business to underfunding at crucial stages of business growth. It can also lead to unforeseen tax burdens or affect your reputation with investors.
The value of your business
When approaching your first round, you need to know how much your business is worth as this directly impacts the funding process and your funding strategy. The valuation enables founders to calculate how much equity to offer investors, so they avoid diluting their control over the business.
A clear valuation helps build credibility with investors and negates the risk of an over- or under-estimation. A well-argued valuation is the cornerstone of successful fundraising.
Your tax position
Investors will be keen to understand your tax position, and specifically whether any tax reliefs such as the Seed Enterprise Investment Scheme or Enterprise Investment Scheme are available. Obtaining assurance before the funding round that they will apply can make your business more attractive.
Get this early, and let investors know, or you risk underplaying the benefits available to potential investors.
Cap table
The capitalisation table or cap table is crucial to understanding who owns what percentage of your company (founders, early employees and any existing investors), and for projecting how this might change in the future as more capital is injected. Investors will use it to calculate their rights to influence decisions and make appointments to the board.
Finessing your cap table will help you negotiate from a position of strength. Use it to figure out how much of the company you can afford to give away, and most importantly, justify that number to funders. Without this knowledge, you risk giving away too much or agreeing to unfavourable terms.
Lastly, an unclear or muddy cap table can lead to future legal disputes or delay due diligence as investors try to unpick the ownership structure.
Cash flow forecast
A good cash flow forecast will accurately present the funds flowing in and out of your business, show what you’re spending your money on, and how much you’re re-investing in business growth. You can also use it to model different scenarios post-funding to demonstrate to investors that you’ve stress-tested the business for financial viability.
As such, it’s a key tool to instil confidence in investors, show scalability and support your valuation. Without a solid forecast, you risk falling foul of the most frequent reason startups fail – a cash crunch. You can use the forecast to show how you mitigate against pinches in cash flow.
Legals
While you may not enjoy addressing the legal aspects of your business as much as preparing your pitch deck, making sure your business is in proper legal order with all essential registrations and protections in place is key to building investor confidence.
IP asp ects
If there are any trademarks, patents or licenses that are critical to your business’s operation, make sure these are owned by the business and/or have been properly registered or assigned to the company pre-funding.
This is particularly important if IP has been created by the founders or sub-contractors individually and not yet transferred to the company’s ownership. Any holes in IP rights will come to light as part of due diligence and you risk jeopardising the confidence of investors as well as delaying or sinking any deal.
Articles of association and shareholder agreements
Investors will be keen to know that you’ve taken the proper legal steps to regulate any internal relationships and processes within the business, and that these have been properly documented.
So, you’ll probably need to revisit and revise your Articles of Association and any shareholders’ agreements so that your investors can be sure that the legal and operation aspects of the business align with their needs and growth forecasts.
Outdated or ambiguous agreement can lead to shareholder disputes, particularly when onboarding new investors. Revising these documents can also help founders to consolidate and preserve their status within the company.
Non-Disclosure Agreements
NDAs help protect sensitive business information provided to potential investors during discussions.
A good NDA helps shield founders against the unauthorised disclosure of any key IP or know-how by investors, even inadvertently. They help set a boundary around what can be shared with third parties and offer protection to founders against the loss of sensitive data.
Commercial contracts
Pre-funding, ensure that you’ve reviewed your major supplier and customer contracts, amending them if necessary. The last you need when negotiating an investment round is a dispute around contract terms or a last-minute contract re-negotiation that might negatively affect cash flow.
Employment contracts
Investors will want to see that employment contracts comply with employment laws, and that if there are any share incentive schemes, that these are accurately documented. Non-compliance can affect your company’s reputation and deter investors. Further, well drafted contracts especially with key talent can help reassure investors that your team is stable and create confidence in its operational integrity.
Companies House filings
Founders should ensure that all their periodic filings at Companies House have been done, and that they are up to date.
Compliance and regulation
Depending on the nature of your business, founders should review their compliance with laws and regulations, for example, permits and licenses, data protection registrations, health and safety and environmental regulations.
Timely legal advice
This article is designed to help you get investment-ready and prepare for an upcoming funding round. Whether you’ve already secured a deal with investors or are at the planning stage, we’d be happy to talk to you about how we can help you make sure you’re ready for the next step.
Legal assistance with your funding round
Our corporate experts can help you ensure your business is compliant and up to date with filing and registration requirements as well as helping to guide you through the information gathering process for due diligence exercises. We can assist with the legal aspects of your funding round, helping you secure the best investment deal for founders.
We have been supporting start-ups for many years so please get in touch with our corporate team if you have any questions or would like to discuss the first funding round process in more detail. Contact us on 0800 689 1700 or fill out the short enquiry form below.
