Many businesses need funding and/or investment to be able to develop their product, launch it to market or expand into new countries. The common route is to give away an equity share or obtain a bank loan. Whilst these are readily available options, they are not without pitfalls and obstacles. We strongly advise clients to fully understand all the options available to them.
As a leading entrepreneur law firm we have worked with many companies, investors and financial groups looking and giving investment. This has given us a unique perspective on the risks and benefits of the different options available (from a legal and operational perspective).
Our view is that before entering into any form of investment negotiation businesses must be armed with all the facts and options. At the same time, they should fully understand their own needs. That way they choose the most suitable route, rather than it choosing them.
So what are the options available to you? Below we have outlined six that are in the market place:
A specifically constructed Tax structure
SEIS/EIS where you offer equity shares. The motive for purchasing these are tax benefits for the investor rather than active control of the company. You can set the price, dividend payment schedule and buy back timeframe. Under these structures the investor receives 50-30% tax back on the sums. This can encourage investors to invest more and certainly makes you more attractive than many others in the market place.
It is advisable to apply to HMRC for advanced assurance to make sure your set up qualifies before you embark on the costs of setting this up. While this may be an attractive option the rules are complex and it is important that you have a trusted accountant and lawyer on board who is knowledgeable around the rules and updates. There are also restrictions on what companies qualify, the investor and what the money raised can be used for so you may end up disqualifying an investor if you are not careful and up to date.
Traditional means of generating money and cash flow for a business. With rates at an all-time low this is even more attractive than before. Here you give no equity away and the interest repayments are often less than an investor expects, but founders are generally required to give personal guarantees. Offering guarantees pierces the limited company protection so you must make sure you are fully aware of your liability and take advice. Often you are ‘jointly and severally liable’ meaning the bank doesn’t have to recover it’s money from all directors or in equal shares it can go after all or one of you for the entire debt.
There are also banks offering accelerator promotions which can deliver funding for lower margins, no personal guarantees, free banking and mentoring. But, you need you to fit their criteria so check out the terms and see how best you can accommodate them.
This is debt financing where you are not giving away equity. There are no personal guarantees required, but you are offering up your businesses collateral as security. You can create a fixed term bond usually 3-5years where you agree a % payment each period payable to the investor. At the end of the period the capital is repaid or you can offer to convert this to shares or continue for a further period. The benefit is you set the rate and give away no control or share in your business. However, you do need to have a repayment plan in place and maintain the interest payments, otherwise the collateral held in security will be sold. The costs of such a vehicle does mean this is something you would embark on only where you require millions in investment. You also need to be clear on who, where and how this will be distributed. There are many regulations around this and you want to be sure of your market before incurring the fees.
If you have secure collateral this is a good means to raise a lot of money with you in the driving seat so long as you have a considered sales pitch/prospectus. However, the key issue for this is an exit plan at the end of the term.
Venture Capital or Angel investments
There are many portfolios of investment groups looking to invest in companies. These types of investors will depend on your needs as to whether you want an active leader for the company or a silent group of investors with money only. You will need to negotiate terms as these professional investors will want a good return and equity share so you need to fully understand their conditions – i.e. what you will get from them in return? How do you get them out if it doesn’t work? Can you accept an offer to be bought out?
Often these groups have a designated time period for a return of which you need to be fully aware. They can also charge up to 7% or more for progressing the investment so you must be aware of these commissions. We have seen groups charging an ongoing annual sum together with the company having to pay high salaries of incoming executives who are appointed by the groups. This could end up being a substantial sum.
Don’t be afraid to question the investors objectives and make sure their long-term goals align with yours. This is where a thought-out business plan and co-founder’s agreement is key. The investor can see that you are all in agreement with the business plans; that you have set out your objectives and from this platform you can all agree a means to progress transparently.
A concept that is taking off especially in the technology world. This raises finance through many people investing small amounts, usually through the internet or Apps. It involves three parties, the project owner seeking finance, the platform which acts as an intermediary and the investor. The purpose of the platform is to match investors and projects together. This means no control is given away over your company, but you will have to pay a commission to the platform.
One possible downside of equity crowdfunding is that you suddenly may find yourself with many minority shareholders all of whom are owed duties by you and your company (or a nominee company operating in a similar way). This is a relatively new concept and yet largely untested. The growth of crowdfunding has taken place in a financial upturn. It is unclear how it will fare in a financial ‘downturn’. The procedures and policies in place for ‘investors’ may not stand the test of litigation should the spotlight be turned on these platforms as it was on the banks during the credit crunch.
The current position is that where a foreign national wants to relocate to the UK he can play an active role in developing a UK business for a visa. They must invest between £200,000 and £250,000 into a UK company in return for a shareholding and nomination as a director. The company can use the monies for its expansion or product development. The conditions to be met here include: employment of 2-3 employees over a 3-5 year period; maintaining payroll records and keeping the investor on as a director for his minimum term for visa requirements. For those wanting permanent leave in the UK quicker they can invest between £2 million and £5 million into a qualifying investment such as a corporate bond for a non-property related business.
Knowing all your investment options is the first step. The equally important second and third steps are “knowing which option is right for you” and understanding “how to win investment”.
Karen Holden is the Managing Director & Founder of A City Law Firm who practise both commercial law and litigation, having been admitted to the roll in 2005. If you require further advice or assistance, please do not hesitate to contact firstname.lastname@example.org
A City Law Firm Limited is a leading entrepreneurial law firm in the city of London, with a dynamic and diverse team of lawyers. It was awarded most innovative law firm, London 2016 and Business Law firm 2017. They specialise in start-up business law, the tech industry, IP and investment