If you are a start up or SME thinking about raising capital then before beginning discussions with any investor, it pays to understand the investment process and have a plan in place. This will help to not only attract investment but also potentially increase the value of any investment you secure as you will showcase your company and your own business skills in the best possible light.
Below we outline some key considerations in preparing for discussions with any potential investors.
The commercial terms
Any agreement from an investor to invest in your business will generally be set out in a term sheet. Some investors will come to you with a proposed term sheet, or it may be that you put together your proposal for investment and give it to the investor for review. The term sheet will cover the key commercial terms of the investment, including governance arrangements going forward.
It is important that you understand and agree with all the terms set out in the term sheet. Equally, you should ensure that you do not leave out any material matters that are important to you. Whilst the term sheet may not be binding even once signed (and indeed, should not be binding other than for certain terms such as confidentiality and any exclusivity) it is difficult to backtrack from these terms once they are agreed, and any attempt to do so is unlikely to be viewed favourably by an investor. We recommend taking the time to getting it right up front rather than batting it down the road to seek to resolve later.
A term sheet will cover the key aspects of the transaction including the price of the investment, the type of share or other security that the investor will acquire, any preference rights attaching to those securities, timing of the subscription and any vesting and anti-dilution rights or obligations of the parties. It will also set out how the investor and other shareholders will manage their investment in the company going forward (usually under a shareholders agreement) including board appointment rights, when and how you can sell your interests in the company, over which types of decisions do certain investors have a veto power and any non-competition obligations. These matters are important as they can govern who will get their money out of the business first (including if there is a shortfall), and also who can control key decisions going forward.
Term sheets can often include a lot of shorthand and lingo. Take the time to ensure you are properly advised and understand the implications of what is stated in the term sheet as this will be critical to the arrangements going forward. Once the term sheet is agreed, then the parties will move to fully document the terms of the transaction (commonly by a subscription agreement accompanied by a shareholder agreement).
The investor
Equally important as to the terms of the investment (for a start up or SME in any event), is the identity of the investor and the “cultural fit”. If you are a company founder, you need to make sure that you get along with the investor, that your goals and values are aligned and that they can provide the support your business needs (whether that be financial alone, or along with business guidance). A lot can be said for taking the time to find the right “partner” for your business and not just jumping at the first money that comes along.
Negotiating a term sheet with a potential investor will give you a valuable opportunity to get to know the investor (and the way they operate commercially) before you become fully entrenched in the transaction. Similarly it is important to be commercial and reasonable in your dealings during these early negotiations, as the investor will be making a similar assessment of you and your business.
The legal framework
If you intend to issue shares or any other “financial products”, then you must comply with the Financial Markets Conduct Act 2013 (the Act). If you are doing a relatively small raise, then you will likely find you can fall within one of the exemptions within the Act, which means you do not have to go to the time and expense of preparing a full product disclosure statement. However this will not always be the case, and you must check this off with your legal advisors as failure to comply with this Act can have significant consequences.
Be ready
If you are not yet at the stage of actively seeking out investment (but may do so in the future), then you should focus on making your company as attractive to investment as possible. We recommended that you ensure your business is as “deal ready” as possible at all times. This includes having a robust business plan and showing objective and measurable value that is beyond the personal relationships and knowledge stored within the founder him or herself. This can include having written contracts with key suppliers and customers, having your trade marks registered and protected, and ensuring your financial and other business records are properly prepared and up to date.
Seeking investment is an exciting time for a growing business, but it is important to take the time to consider the right investor and the right investment terms to give yourself and your company the best opportunity to maximise the value of that investment going forward.
If you would like any assistance with raising capital or investing in a business, do not hesitate to get in touch with the Business Law team at Lane Neave.
Business Law team
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper
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