We recently sat down with Avery Law to bring you a webinar explaining the legal planning that goes into an efficient, stress-free fundraise.
To all those that attended – thank you!
If you missed out this time, don’t worry. We’ve uploaded a full recording of the session below, so you can watch the webinar on-demand.
We’ve also outlined the main takeaways highlighted by our co-hosts at Avery Law.
💡 An overview of fundraising, and the types of funding available
David and Jessica kicked off by explaining the three types of fundraising available to startups and SMEs.
The first of which, equity-based fundraising, is a clear frontrunner for UK businesses. Equity-based fundraising involves the investment of capital in exchange for part-ownership of the company.
Investor relief initiatives within the UK lend themselves to the equity method of fundraising. The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) were implemented to offer tax relief to shareholders of UK companies at different stages, mitigating the financial risk involved in investing.
It's important to consider the composition of your desired fundraise: do you want to pursue Venture Capital firms, Angel Investors and high net-worth individuals? Are you listing on a crowdfunding platform, like Crowdcube or Seedrs?
Your business will likely be better suited to one of these routes over the other.
For example: if you're raising for a B2C business, crowdfunding might be your best bet. Get your product in front of the masses, and design your profile in a way that resonates with a large pool of investors.
Alternatively, if you're raising for a B2B company, traditional investor panels with an expert perspective on market research may see more value in your project.
Debt fundraising - the investment of capital in exchange for repayment plus interest - is a viable route for many, but less popular than dealing with equity.
Other fundraising methods exist, such as revenue-based financing (RBF) through e-commerce investors at Uncapped. Uncapped charge a flat repayment fee that doesn't rack up over time, and aligns repayment with how well your company is doing financially.
💡 How to legally prepare your business for a fundraise
Before going into your fundraise, consider taking advantage of a data room. Many early-stage companies use sharing software such as Google Drive or Dropbox, but it's a good idea to keep a comprehensive base of all of your legal documents.
This will save you a lot of time come fundraise, when investors undertake their due diligence. And better yet, keep them updated and ordered chronologically.
Also think about your shared capital structure, or your Cap Table. It's really important to make sure you approach investors with clear documentation of 'who owns what' in a company. This is because investment of capital will require some re-organisation of the existing shared capital structure.
Watch out for rogue introducers. There's a lot of people that might say they'll find you investors for a percentage success fee of the fundraise.
A lot of introducers will be authorised and reputable, but you need to do background checks and perhaps go with an introducer that someone in your network can vouch for.
"A lot of institutional investors just don't see the purpose of signing a Non-Disclosure Agreement (NDA), so don't let this put you off. Resistance with signing an NDA should raise concern only when dealing with lower-level investing parties, such as High Net-Worth Individuals."
You have to be hyper-vigilant with less reputable investors that may have ulterior motives behind accessing your IP and data room.
💡 Important legal aspects to consider throughout the fundraise process
A term sheet is a document outlining the material terms and conditions of a potential business agreement, establishing the basis for future negotiations between a seller and buyer. It is usually the first documented evidence of possible acquisition.
It's important to have a lawyer on board by the time your putting together a term sheet. Jessica pointed out that a lot of companies overlook the importance of legal advice at the term sheet phase, because they see it as very commercial and assume that they can do a sufficient job themselves.
The truth is that if you don't have proper legal advice when structuring your term sheet, it may be more difficult to negotiate down the line.
Expect incoming due diligence questionnaires from potential investors - this is where having an organised data room really pays off.
A key legal aspect to consider is making sure you have your Intellectual Property (IP) foundations set up so that as you transition from bootstrapping to becoming externally funded, the ownership of your IP is allocated correctly.
Investment documentation is extensive and complex - you can find a detailed breakdown of SSA, articles, disclosure letters, service contracts, and ancillaries within the webinar recording at the timestamp of 00:21:00.
Legally, the fundraise process can be broken down into three stages; negotiation, execution, and completion.
Expert legal advice is extremely valuable across all three. In the negotiation stage, your lawyer can take care of the time-consuming back-and-forth that goes on whilst your building out a sound proposal.
Legal advice can also prevent you from agreeing to things during execution that might come back around to bite you.
Sometimes, time-poor founders are stretched too thin, and want to seal the deal with investors as swiftly as possible. But when signing and drafting contracts are involved - no shortcuts should be taken. Have a lawyer on your side!
Upon funding completion, EIS and SEIS share agreements will need to be facilitated by a legal professional. Lawyers step in to control the process and make sure you get funded without a hitch.
Avery Law offers popular post-completion services, including expert preparation for your next fundraise, easy-to-digest compliance playbooks, and subscription-based company secretarial (CoSec) services - absorbing and handling all the strenuous legal protocols that come your way.
Navigating a fundraise is a high-stakes activity. Building a businesses takes a lot of hard work and perseverance, and unfortunately, it can all be unravelled by insufficient legal planning, or poor decision making.
Be sure to take advantage of a law firm, such as Avery Law, to scale your business safely.