Fundraising and Investments

Firstly, you’ll need a company. It is possible to fund different business structures that are not companies (such as LLP’s, partnerships and even sole-traders). However, it’s a lot more complicated and your investors are unlikely to want to fund non-corporate structures. So, best to stick with a simple company.

If you have more than one ‘founder’, then it would be usual (and sensible) to have a Founders Agreement or a Shareholders Agreement in place, before you start looking around for funding. There are a number of benefits of having this in place pre-funding. Firstly, you’ll need it anyway to govern the relationship between the founders and to avoid deadlocks and disputes. This is more relevant when investors start to show interest in your company and it becomes clear to the founding shareholders that the company now has a significant potential value. It also shows your investors that you are ‘serious players’ and have placed your company on solid legal foundations.

Other items which are useful to have in place include a Business Plan, Pitch Deck and Share Cap Table.

Your Business Plan should provide a summary of your business aims, including market research, financial forecasts and the amount of investment you’re looking for and what you intend to spend it on.

A ‘Pitch Deck’ is often created in PowerPoint (so it looks sharp and colourful), and gives a short and punchy overview of the highlights of your Business Plan.

Your Share Capitalisation Table (or ‘Share Cap Table’ for short) sets out the current shareholdings in your company, and may also include any share options and the structure of the company following completion of your proposed fundraising.

Often, when your company is just getting established, and before you have any real revenues or substantial clients, you find you need some investment money to get you started.

At this point, because the project is new and untested, it is more likely that you’ll be able to interest those people who know you best (your ‘friends and family’) in investing in your new business.

The sums invested tend to be much lower (say £10,000 – £50,000) and the investors are less likely to want to carry out extensive due diligence investigation into your business, as they trust you already. So, this sort of investment can often be done with little – or sometimes no paperwork (although, obviously, that’s not advisable). Better, in this case to use some minimum, standard contracts (such as a short subscription agreement) to make sure both sides feel they are appropriately protected. It’s also useful to keep those agreements as records of the investment, when larger investors come along later and may want to review your business contracts.

The term ‘seed funding’ or ‘seed fundraising’ doesn’t actually have a legal meaning. The term ‘seed’ just refers to the initial growth stages of a business. So, in practice, usually refers to the first main round of funding a company will experience (perhaps, following a ‘friends and family’ round).

There are a number of specialist Seed Investors. Some of the best well known seed investment funds include ‘Seedcamp’, ‘Fuel Investors’, ‘Entrepreneurs First’, ‘Forward Partners’ and others. Often, early stage investment funds like these also provide ‘bootcamps’ or ‘accelerator hubs’ to help new companies develop and grow their businesses. As the numbers of investor funds increase, it’s worth doing your homework to see what else, apart from just the money, the fund may help you with.

In addition to the investment funds, there are also a large number of individual seed investors, often called ‘Angel Investors’ who may be interested in investing in your company. Again, its worth doing your homework in terms of seeing which other companies these investors have invested in and speaking to them to see what they said about the experience!

To attract Seed Investors, you should prepare a suitable Business Plan, Pitch Deck and Share Cap Table (see above) and also a Term Sheet.

The Term Sheet will set out details of your existing company structure (directors, shareholders, any earlier fundraisings) and the proposals you are making to investors for the current investment round. For example, the number of shares being offered, the share price and the pre- or post- investment valuation of the company.

Again, although there are no set rules as to what many of these terms mean (and you will find that some investors have their own opinions), generally Series-A funding is the round which comes after your Seed Round.

This is usually where you move from ‘seed investors’ (see above) to venture capital funds or ‘VC’s’ as they’re known in short.

VC funding is usually at a much higher level, often over £1m, and will often be structured in a more complex fashion. For example, VC’s will often take a separate class of shares, or require specific share rights (such as a liquidation preference), may want a seat (or two) on your Board and will require ‘Investor Consents’ (which means they may get veto rights over certain company decisions).