21 November 2023

Lifecycle of a Business - Are You Ready to Raise Funds?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered “First Things First” and “Directors: Lights, Camera, Action!” But now, let’s consider financing your business – “Show Me The Money”.

Are You Ready to Raise Funds?

We’ve recently been discussing a company’s options in relation to third party fundraising and the various tax consequences. But what practical steps can you take to help the fundraising process?

Being ready to raise funds is a position that every business should seek to be in even where fundraising is not an imminent objective. From a legal point of view, being ready to raise funds really just means knowing where everything is, and being able to demonstrate everything you know about your business to somebody who is taking a look at it. Plus, you want to be able to provide this information as soon as, or possibly before, it’s asked for by any potential investor.

You’re the entrepreneur and I expect that you’re all over your business plan, but, apart from that, here are some of the key things to check are in order:

  • Your Company Books - starting with a ‘fun’ one, it’s a legal requirement to keep certain statutory registers up to date, such as your register of members. Having ‘up to date’ filings on Companies House is not the same (although potential investors will be taking a look at these too) as it’s the register that shows ownership of legal title to shares. All investors will expect to see these books to check that all is as they expect.
  • Your Cap Table - your register of members should also be translated to a user friendly cap table that you’ll be able to use to consider pre- and post- money ownership percentages and dilution on a fully diluted basis (i.e. including any option holders or holders of other convertible instruments that will not be on your register of members). Having this ready will help when you negotiate your valuation with investors too. There are online providers of software to help you manage this which may be useful once you have raised funds.
  • Your Financial Records - what potential investors will want / expect to see will depend on the stage of the business, but any accounting records should be well maintained and available for review.
  • Your IP - many companies are IP rich and IP should always be considered. For example:
    • Have all consultants signed IP assignments?
    • Has anyone who has worked on IP for the business (including founders and employees) before the company was incorporated signed IP assignments?
    • Have any other IP assets been protected or what is the strategy around that? Is the company name trademarked?
    • Has open source been used and can you demonstrate that the terms of the licence don’t require your own IP to be distributed freely?
  • Your IT
    • Do you have a summary of your IT system that you could disclose, with the documentation to support that summary should anyone wish to look at the detail?
    • Can you demonstrate that you’ve thought about cyber security? It’s a podium placer for top risks to businesses and demonstrating that you understand the issue, by setting out the approach you take to mitigating the risk, will help put minds at ease.
  • Their Data - Where is the data you control or process, what is it, and how do you go about making sure you’re dealing with it lawfully? What’s expected of you on this will depend on how data rich your business is and what stage your business is at, but regardless of the answer to those, there will be an expectation that you can show that you’re on top of it.
  • Your Customers and Suppliers - Are your customer and supplier relationships documented in up to date, unexpired and fully signed contracts? You will likely need to disclose these during the investment process (considering first any particularly sensitive information and whether confidentiality provisions apply).
  • Your team
    • Are the terms of engagement of your employees, workers and consultants all in writing and have they signed up to restrictive covenants, confidentiality undertakings and, where required, IP assignments?
    • Are any incentive schemes in place and if so, are all scheme documents available?
  • An NDA - Before disclosing anything secret, consider agreeing a confidentiality / non-disclosure agreement (NDA) with proposed investors. Having a reasonable NDA ready to sign could help this process (although keep in mind that some institutional investors may require their own paper to be used, not to be difficult, but because it’s been through their own in-house legal review and forms part of their own investment process). Similarly, institutional investors look at so many initial decks that they may not have the time or inclination to be troubled by negotiating an NDA, so think about the ‘when’ of seeking an NDA too.

Having the above in mind will keep you on the front foot when going out to raise funds, whether it’s from angel investors, VCs or otherwise.

Disclaimer

This note reflects the law as at 15 November 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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