Securing funding is not for the faint of heart, and one mistake can mean the difference between a ‘yes’ and a ‘no way.’ So, if this is the year your business needs to raise venture capital for women founders, here are the top ten areas you need to look at before you start your raise.
1. Clear offer
Have you clearly stated 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.
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.
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.
Have you allowed for key investor protections such as tag-along rights, pre-emption rights and voting rights in existing or proposed legal documents?
Have you ensured adequate insurance is in place? This could include public liability, key person insurance and business interruption.
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?
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.
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.
6. Intellectual property
Have you made sure all IP is owned by the company, as opposed to individual members of the management team?
7. 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.
Do you have a recent balance sheet (less than three months old) that has been produced by someone with a suitable accounting qualification?
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.
Moreover, consulting with an assets finance company can offer insight into alternative funding options and strategic financial restructuring to help navigate the challenges and support the business’s recovery.
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.
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.
Is there an Employee Share Option Plan (ESOP) to incentivise new and existing key members of the team who are not already shareholders? This could be under the UK tax-efficient Enterprise Management Incentive (EMI) Scheme.
Many founders put money into their business initially in the form of a directors’ loan. You must disclose this fact and explain how the loan is to be treated following investments, since, technically, investors’ funds could be used to repay the loans immediately and not be used to grow the business.
Is there, or have you plans to put in place, an independent chair or independent non-executive director ensuring the business is being run responsibly? A good non-executive board (i.e. individuals not involved in the day-to-date running of the company) can support the executive team and help steer the business to success.
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.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.