Female founders successful growth : what you need to consider & how to scale your business effectively  - Photo by August de RichelieuOur last article discussed why female founders need support & opportunity. We now look at how they strive forward & what they need to consider commercially, legally & practically.

Is it all about the money?

As a woman running my own business, I have seen many ups and down in establishing and scaling my business. I advise thousands of businesses getting ready to start, scale and seek investment right up until they exit or sell. It is never easy. There are always ups and downs, but the market is vibrant right now. Investors are keen to enter the UK market, and female founders are seeing more active interest than ever before.

Fundraising for many businesses is vital so being prepared is likewise the key. No more so for start-up technology companies who burn through a considerable amount of money, especially when pre-revenue. As such, getting investment is essential, but being prepared for the deal, having robust contracts, good tax structuring advice, watching cash flow and having projections is equally as important as the pitch and end game.

So what are the key considerations when trying to raise capital for your business?

1. Look at your options

Over the years, we have seen many businesses turn to equity financing without exploring the options available. For many, it is seen as the easy option, but this is not necessarily the case. Founders can use other offers simultaneously or as an alternative. These include debt financing, where you do not give up a share of your business. This can be with high street or commercial lenders who are displaying commercial rates presently, or maybe you qualify for grants (essentially free money) as the UK offers many. Businesses should also consider whether there is R&D relief available which can result in a cash payment based on funds you have spent on R&D.

2. Due diligence on your business

You must look carefully at your business and company from the perspective of any potential investor. As part of any investment process, you can expect a degree of due diligence. This often takes the form of legal, financial and commercial due diligence. The extent and volume of due diligence normally depends upon the amount invested. It is, however, important to identify potential areas of concern swiftly. So take a look in the mirror and be prepared with concise, executed documents. With answers to their tough questions and don’t forget to impress upon them your unique selling features, experience and passion.

12 Areas of legal due diligence

Areas of legal due diligence can be summarised as being able to respond and address the following key areas:

  • Do you have suitable contracts signed with all staff members employed or otherwise? Do these have suitable confidentiality clauses? Do they protect the businesses’ intellectual property and hold suitable restrictive covenants?
  • do you have signed contracts or valid terms and conditions with all customers and suppliers?
  • Do you have an agreement regulating the founders? A shareholders agreement is essential for any business.
  • Have all shares been properly allotted and transferred?
  • Have you filed everything at Companies House that should have been filed?
  • Has someone been promised something from the business, such as shares, which isn’t in writing or reflected at Companies House?
  • Is there any current dispute, litigation, investigation, or risk of the same?
  • Who owns the business’s intellectual property, and how can you prove this?
  • Have you got any consent or license or regulation you need to sell your product or service?
  • Have you got a commercial property? Have you got a commercial lease in place or an agreement to use the space?
  • Have you considered Data Protection carefully?
  • Have you registered and protected your IP?

This is just a taste of the legal questions and documents that could be requested from you that should be carefully audited, updated and executed to protect the business.

3. Is it the right investor?

So often, founders neglect to consider whether the potential investor is a good or even suitable fit for the business. We would encourage all founders to carry out their own level of due diligence on any potential investor. By selling shares in your business to someone, you are creating legal rights and obligations for that shareholder. With any business, there are the inevitable hard times and difficult conversations. Having a suitable investor who is a good fit for your business makes those conversations a bit easier. It doesn’t dilute your obligation or legal duties not to unfairly prejudice them or act in breach of your fiduciary duties, but it may make it a bit easier to address and remedy.

There are many different types of investors, and each fits different types and scales of businesses. Depending on the size and stage of the business, this may be venture capital, private equity, angel investors, trade investors or friends and family.

Some of the due diligence you should be doing on any potential investor and questions you should be asking are:

  • What are the investors’ exit plans? Are they aligned with yours?
  • What are their and your expectations of a return?
  • What other companies are in the investor’s portfolio
  • What is the length of the fund?
  • What is the impact or sector of the fund?
  • How involved does the investor want to be?
  • How experienced is the investor?
  • Do they benefit from EIS? Have you considered this?
  • What demands are they making?

4. Legal Documents

The documents you can expect to receive as part of an investment round are:

  1. A subscription agreement or investment agreement. This regulates the terms upon which the investor puts the funds into your business. This is likely to include warranties or promises about the business and your company, so these need to be carefully scrutinized;
  2. A shareholders agreement. This regulates the high-level operations and running of the business. It governs the relationship between the shareholders. This document typically includes ‘reserved activities’ or ‘investor consents’, which are the list of activities that the company can and cannot do without the investor’s consent. This is where you negotiate.
  3. A disclosure letter. This deals with specific disclosures against any warranties so you declare anything required so its not later held against the company, as it was on the table.

You may also receive updated service agreements (employment contracts) for the founders governing their role in the business and usually include provisions on payment and expectations on services.

Why is there still such a difference in investment afforded to male-owned businesses to those founded by all women?

UK VC & Female Founders report, commissioned by Chancellor Philip Hammond at Budget 2017 and undertaken by the British Business Bank in partnership found:

  1. For every £1 of venture capital (VC) investment in the UK, all-female founder teams get less than 1p, all-male founder teams get 89p, and mixed-gender teams 10p.
  2. Venture Capital investment in start-ups with female founders is increasing, but progress is very slow.
  3. 83% of deals UK VCs made last year had no women on the founding teams.

One would hope things have changed, but data showed in 2020, of the £12bn of UK VC investment invested, companies with an all-female founder team would have received just £120.1m. Mixed-gender teams would have seen £1 billion and all-male counterparts, just shy of £10.7bn. This again, we fear, is more about applications rather than decisions. A report on acceptance/rejection would be interesting but not easily put into context. Essentially female founders securing investment is increasing but still far apart from that taken up by all male founder businesses. One important question is: why are there less female founders seeking investment?

Are there less in general? Do they prefer to self-fund and consider debt financing? Or are they being rejected? Whatever the reason, we need to encourage and support all businesses to scale up and become successful and particularly entice female founders into the investment ring.


ACLF logoIn the meantime, if you can’t wait, you can contact us directly for impartial advice by visiting our website https://www.acitylawfirm.com/ or emailing [email protected] 

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 [email protected] 

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.

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