A company’s requirement for capital means that investment will often be an option. Adam Kean, Senior Associate at BPE Solicitors, looks at the different types of funding and how businesses can get the most from an investment to help support longevity and a route to an eventual exit
Business growth is fundamental to long term success. What this growth looks like will vary on a case-by-case basis but will often involve raising additional capital. When raising equity finance, getting the right legal advice to ensure a deal is successful and achieves the best outcome is paramount especially as, unlike with debt finance, a third party is taking a percentage ownership of the company.
For start-up businesses or those in their early stages, apart from investment from founders or personal connections, angel investors (either stand-alone or as a syndicate) who are investing their own private wealth are the predominant source of equity finance.
At the early stage of a business, the risk to investors is at its highest and, therefore, angel investors are investing in the people as much as the concept of the company. Venture capital on the other hand, whilst also available at an early stage, will look towards companies which have a more developed business because their appetite for risk and requirement to cover administration costs can prohibit the funding of a start-up.
A private equity house would be looking for the least risk and will be seeking, in the main, established businesses with an emphasis on a faster increase in growth and exit.
Finally, crowdfunding is increasingly being used as a comparatively efficient way to raise funds, as it is generally a simpler process with the investment being predominantly recorded through the Articles of Association.
Regardless of the investment type, it is essential to have the advice and support of a legal team that understands this financial landscape. Taking a marketstandard approach to help avoid unnecessary deviations is crucial, otherwise any delay could potentially jeopardise the investment going ahead.
What should you consider when preparing for investment?
- Check if SEIS and EIS tax relief is available. This is particularly attractive to early round angel investors as it improves how their shares are treated on sale.
- Carry out vendor due diligence to identify any problems and resolve these in advance.
- Make sure you have a clear and detailed business plan to demonstrate that the company is investment ready
The amount of equity given away, especially in early rounds, should reflect
“At the early stage of a business, the risk to investors is at its highest and, therefore, angel investors are investing in the people as much as the concept of the company”
the likely need for further investment down the line. Giving away too much too early could become problematic as it is unlikely that the first round will be sufficient to reach the end goal.
Added value, over and above equity alone, provided by investment deals is an important consideration. Expertise is something which an angel investor, venture capital fund or private equity house can all bring to the table, therefore consideration should always be given as to what added value a company is looking for.
At BPE, we understand that whilst the long-term upside to a successful investment is clear, the process itself can be a significant distraction from running a business. We offer the help and support needed to guide companies through the process to achieve a timely and successful outcome.