Funding considerations for start up businesses
One of the most exciting aspects of being a corporate lawyer is advising start ups and entrepreneurs on how to make their idea a reality.
One of the main issues with being a start up is that you may have the idea, the connections and even the contracts in place that you need to run your business but without funding it can be difficult to take it to the next level from being a start up run out of your kitchen to a proper business.
Seeking funding can be extremely daunting, especially when the business is your baby and you have never had to answer to anyone else but have been running it the way that you think is best. It’s really important when you decide to grow your company to make sure that any funding that you seek, suits your needs and doesn’t restrict you from realising your vision.
Important things to consider are:-
a) The type of investor that you are looking for – do you want someone that will silently invest allowing you to get on with the business of running your company or do you want an active partner, someone that brings experience, connections and know how and will be on hand to offer advice and wisdom when needed and required.
b) The amount of investment that you require? – you will need to carefully consider what level of investment is needed to give your business that extra push. Are you looking simply for an increase in working capital, a cushion for the quiet times or a large level investment to get your business to the next stage.
c) What level of control are you prepared to relinquish? – are you going to allow the investor equity in exchange of an influx of cash? Will you be providing security over the assets of the business? Will you provide a personal guarantee or are you simply looking for a straight loan?
Don’t let your angel become a devil
I’ve noticed over the last few years as a result of poor interest rates and favourable schemes (such as EIS) a number of high net worth individuals are becoming “Business Angels”. Generally a Business Angel is a high Net Worth Individual that is willing to invest in a new venture in exchange for equity.
We generally recommend that a detailed shareholders and subscription agreement is entered into by the parties setting out not only how the company is going to be run on a day to day basis but also how the investment is to be utilised, what type and level of equity is to be given and what rights will be afforded to the investor.
To allow the investor to maximise its chances of recovering the full amount of its investment they may request a different class of shares which has enhanced voting and dividend rights attached and the right to be appointed to the board of directors.
They will also generally require a comprehensive suite of minority share holding protections to ensure that the founders cannot dilute their shareholding or move the company in a direction which they don’t feel comfortable with.
Seasoned investors are often not looking for a life time investment but rather a way that they can maximise their investment in the short terms and we are often asked to draft and negotiate exit provisions on a 3 – 5 year basis which will allow the investor should it so chose to sell its shares to the founders and/or a third party.
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