At Envestors, we’ve helped over 200 companies raise capital and so we know what it takes. Studies show that most pitches get thrown out because of market issues, management profiles, and financials. So, if you want to win over investors it pays to spend the time ensuring you have everything you’ll need before you start your raise.
1. Make a clear investment 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
2. Ensure shareholder protections are in place
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 sure all IP is owned by the company, as opposed to individual members of the management team?
3. Documents must be in order
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.
4. Provide accurate information and appropriate disclosures
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.
5. Be clear about financials
Do you have a recent balance sheet (less than three months old) that has been produced by someone with a suitable accounting qualification?
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.
Are you planning further funding rounds in the future? If so, it is helpful to set out the timing, amount and terms.
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.
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.
6. Full disclosure of directors
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, 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.
Securing funding is not for the faint of heart, and one mistake can mean the difference between a ‘yes’ and a ‘no’. Sorting out the matters above will significantly increase your chances of raising investment as well as making it happen much more quickly
