Understanding the detail of your investment deal and planning for your post-investment world is just as critical as getting through the deal itself.
So you’ve found an investor. And you’re all agreed on what percentage of the company they’ll get for their cash. Happy days. Deal done, right?
We’ve helped many companies through the trials and tribulations of the investment process. And we’ve seen too many that have gone wrong because they didn’t get the right advice up front. So learn from other people’s mistakes and read on for some of our tips on how to make your investment successful in the long term.
What to think about before you talk to investors
Get the right fit
A lot of founders jump at the first investor that makes them an offer but, remember it’s not just about the money. You need to think about whether they are the right fit for you and your
You need to think about whether they are the right fit for you and your long-term vision for your business. Think about whether you’re looking for guidance or support in certain areas of your business as well as the money.
If you’re looking for guidance, you need an investor who has the right experience. More and more venture capitalists (VCs) are specific to certain sectors and stages of business so if this is your chosen route make sure they have the right experience for your offering.
Look at all the options; ask yourself whether you’re prepared to give away part of your company and some control over it. Also consider applying for grants, R&D tax credits, loans from banks and new types of lenders, crowd-funding and so on.
Sometimes the best option isn’t always the sexiest, but not everyone needs VC or angel investors. It often seems like success is measured by how much funding you raise but this is not a long-term solution, as many have found out.
You have to be reasonable about what investors want and what control they will get. We’ve seen deals fall apart because of unrealistic expectations about what compromises have to be made for the money.
And remember investors invest largely in founders themselves. If you want a quick exit then you’ll probably get a lower valuation, or you may not get investment at all. Most investors insist on long term tie-ins and 100 per cent of your working time dedicated to their investment.
What to do before you talk to investors
Get your numbers together
Investors will want to see clear financials and sensible projections or forecasts— emphasis on sensible. They’ll also want to see a well thought-out business plan showing how you plan to scale, what you’ll use the investment for (new staff, tech development) and how long it will take (known as a burn rate).
Know exactly who owns what
You’ll also need a ‘cap table’ showing who owns what shares. Investors will want to know that all your shareholders are ‘invested’ in the business, i.e. they’ve either contributed money or time and services.
Be careful about who you give shares to up front and how many you give them. It might seem like the fair thing to do at the outset but can lead to nightmarish disputes.
We’ve seen so many instances where shares have been divided between friends but then they fall out, or given to a tech developer or a sales person in ‘payment’ but they then don’t perform as expected. Don’t let this happen to you.
What you need to know about your deal
Don’t overlook the detail in your excitement to get the money. Ask the following questions before you sign anything to make sure you’ve got all the right information to make an informed decision:
- Will they charge a fee for connecting you to other investors?
- How will founders be tied in? Are there any circumstances where they will have to sell or forfeit shares? Under what circumstance can founders be removed? (These are known as early/ good/ bad leaver clauses.)
- How much input will they expect on your business plan and budget?
- Do the investors want shares with preferred rights – either to dividends or on an exit? And do they want protection against future down rounds or anti-dilution protection?
- What warranties/ indemnities do they want and from which founders? (Warranties confirm the status of the assets and liabilities, an indemnity is a promise to pay if a particular liability arises). If there is a problem, is the founders’ liability limited or can they take your house and children?!
Getting your house in order
Due diligence process
Investors will want to do their due diligence: financial, legal and technical. Make sure you’re ready for this so you don’t delay the process, otherwise it could cause cash-flow issues.
Putting all your financials, company documents and contracts in a Dropbox folder or similar is a really good start. They will want to see details of your intellectual property and technology to make sure you own what you say you own. And they will want to see that key staff have proper employment contracts.
If investors are using HMRC tax breaks (SEIS and/or EIS) make sure you tick the relevant boxes and keep them ticked.
And line up advisers early. You’ll need a good tax accountant and lawyer with lots of experience advising on deals like yours.
Don’t rely on people you’ve used before if they haven’t got the right experience – the person that does your book-keeping, helped buy your flat or draft your will isn’t right. Nor are the big city law firms (unless you’re raising millions) as they’ll have to use the cheapest (i.e. most inexperienced) resources to come within your budget. Shop around and ask for referrals.
A good adviser: will tell you when and how to work with them, what the deal and process should look like, stick to the budget, and won’t overdo the advice.
Many deals can be done on quite simple paperwork. A quick call early on can save a world of pain later on down the line.
What you need to do post-investment
This may sound obvious but you can’t just sign the documents and then do what you want anyway. Make sure you understand what you’re signing up to and have negotiated the bits that are important to you and your business.
If the deal doesn’t look like you originally expected, don’t close your eyes and sign, hoping it can be sorted out later – once it’s done it’s difficult to change things. And be prepared and ready to comply with your legal docs so that your investment ends with a happily ever after and not in the courts.
About the author
Helen Goldberg is COO of Legal Edge, a cost-effective commercial legal service especially for SMEs, with a team of flexible lawyers who all have worked with businesses before. Helen and her team help SMEs manage their legal strategy, process and budgets better.