A high percentage of investment offers fail to raise finance. If you are to be successful, you need to make sure you are fully “investment ready”. This includes clearly stating 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. But there is much more you’ll need before you start your raise.
OFFER AND PROTECTIONS
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?
Intellectual property (IP) ownership: Have you made sure all IP is owned by the company, as opposed to individual members of the management team?
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.
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.
DISCLOSURES
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.
MONEY
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.
THE TEAM
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.
Studies show that most pitches get thrown out because of market issues, management profiles, and financials. One mistake can mean the difference between a ‘yes’ and a ‘no’.
By Oliver Woolley, Envestors
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 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