Tahir's Tips: Legally Preparing for Investment

Funding is a crucial factor in any successful start-up’s story. An injection of cash can provide the additional working capital that gives a start-up the platform to scale in a way that would not be possible with its finances alone. Raising money is something many aspirational start-ups may have to prepare for. Funding might come from a personal contact (if you are lucky!) or a third party investor. Before you seek out investment you should ensure the business is in tip top shape.

We work with hundreds of start-ups and help them prepare for funding. Every business will have its own individual needs and quirks; however, there are certain legal considerations when preparing for fundraising that are common for all. Today’s tips look at the common legal considerations to consider:

Choose the right corporate vehicle

Most investors will want to receive shares for (at least part of) their investment. They will be familiar with the private limited company structure and other corporate vehicles may be less attractive (e.g. limited liability partnerships). Setting up a private company is cheap and can be done almost instantaneously if you purchase a shelf company.

Get help

Getting the right advice early on in relation to business structure is important so as to ensure no problems with tax planning arise, essentially making the company more investor friendly. Most investors will be more incentivised to invest in a company if it is for example, EIS (Enterprise Investment Scheme) and/or SEIS (seed Enterprise Investment Scheme) ready. These schemes are designed to help small to medium sized companies raise finance by offering a range of tax relief to investors who purchase new shares in those companies.

Pre-investment shareholdings

You should make sure these are correctly reflected in the company’s statutory books and also at Companies House. Make time for (boring but important) administrative tasks such as these. You should be wary of any verbal promises of shares made to employees, contractors or interns as these create uncertainty as to what shares are with who.

Written employment contracts and consultancy agreements

Investors will want to review these as part of their due diligence. Make sure they are in place and contain clauses relating to intellectual property (assigned to the business). See my previous notes on employment contacts here and here.

Written agreements

It isn’t just written employment agreements that you should have in place. Investors will expect to see copies of written agreements with all key customers, suppliers and revenue streams. Ideally you will have your own standard terms and conditions which are used. However, don't fret if you don’t use your own terms as investors are often pragmatic and see one-sided written contracts as being better than nothing at all.

Confidentiality

It is essential to have confidentiality agreements/NDAs in place for the investors. This will send the message that you are the real deal and mean business. Timing is important here – a confidentiality letter with investors should be signed as early as possible in any potential deal. Experienced investors will be expecting this so don’t be afraid to ask. You should also have confidentiality agreements with employees and consultants (these should be in employment contracts) but it is sensible to remind staff of these obligations.

Due diligence

Investors will want to investigate the nuts and bolts of the business thoroughly prior to any deal. This can be lengthy and a fairly arduous process. You should anticipate what investors will want to see and collate them in a single place in a logical indexed format. Preparation is key! Make sure key financial documents are kept up to date. Keep a record of everything you have supplied to the investors and mark all confidential information as such. Don’t forget to check that the domain names and any registered 'Intellectual Property Rights' are registered in the company’s name and not a third party’s name.

Time frames and managing an investment round

It is important to understand the time and effort it can take to raise finance. A typical investment round is likely to last around three to six months from start to finish (although everyone always tries to make them shorter). The process can also be very distracting for management and it is important for the business to pick the right internal team to lead the investment rather than having all of the management team involved. Don’t forget that you have a business to run while you are trying to raise the money (and remember not all deals reach completion). It is also worth having lawyers and accountants who have experience on having worked on investment rounds before as that experience will be crucial in managing and finalising the deal process.

Changes after the investment has been raised

Once you have taken someone else’s money and given them shares in return, you have to brace yourself for the fact that you now no longer run your own business. You now work for your shareholders, some of whom are your investors! As a result the investors are likely to want at least one seat on the board and a veto on key business decisions. They will also likely have a right to regular financial information so that they have full transparency on the monies coming in and out of the business and future projections around that.

If you’d like to find out how to pitch to an investor, come to The Industry's Master Class with The House of Britannia on the 26th April at the Condé Nast College of Fashion & Design. For more information, click here.

For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.