The road to fundraising is long, laborious and full of rejections. Ask any experienced founder, but do not despair. Getting the basics right can make the journey a hell of a lot easier. 

It is important to understand that fundraising is a continuous process that involves not only attracting the capital necessary to grow the business, but also getting the right strategic investors, raising awareness about the product, establishing (or destroying) your reputation and learning to prioritize your time and communication. You should never lose sight of your product, customers, team members and values as ultimately your value proposition is what matters most. 

In this first part of the fundraising blog article series, we will look into the typical funding stages and good legal practices thereof: the funding process is rarely that simple and often funding sources and stages will overlap. It is also important to ask yourself the following question: What does the funding cycle suitable for my company and its path to success look like? 

If you are running a niche enterprise and have a product that can achieve early-trade sales upon successful validation, it hardly makes sense to plan for a Series B and further funding. Conversely, if your product is new, innovative and destined to scale fast, then the traditional venture capital funding in several rounds that buys into your dream will require a different planning. 

In the pre-seed stage you are likely to not be ready to build the final product and would rarely have any paying customers. At this phase, your own capital (Bootstrapping), Friends and Family, or more adventurous Angel Investors could come into play. Other early funding sources include incubators, accelerators and government grants and loans. Bootstrapping means funding your company through savings or your existing income. Investors feel more confident investing in a business where the founder has had the conviction to risk their own money - or have some ‘skin in the game ‘as they say. With this initial investment you should establish some traction, build a Minimum Viable Product (MVP) and preferably show that customers are willing to use it and pay for it.

At the seed stage, your typical investors are Angels and VCs that venture into the angel space. Crowdfunding is another source of funding, but it is not suitable for every company. You must remember that ideally you should attract smart money, i.e. investors who, besides capital, can provide expertise, help you solve problems, open doors through their network and possibly help you onboard the right next stage investor. The crowdfunding crowd will rarely provide any value other than becoming a loyal customer and brand ambassador which in some cases is actually a great strategy. Those funds should get you to the point where you have established a strong core team, demonstrated product market fit and generated some sales and revenue. 

From here, you will be looking to raise larger amounts in series A, B, C and beyond. Investors may include venture capital firms, super angels, family offices or other investment firms. As companies grow even bigger, they may need to raise more capital to acquire companies, expand into new markets or create new products. Investors at this final stage include private equity, strategic partners, or an initial public offering (IPO). Most start-up exits actually occur through trade sales so make sure that when asked about your exit strategy the ‘IPO’ word is not your default and badly researched reply. 

Now to the legal matters. Getting your legal house in order early could save you tons of problems later, will allow you to cruise through investors’ legal due diligence and could even mean the survival of your company. At First Steps we have a dedicated Document Service to cover those essential legal steps (pun intended). 

Firstly, you need to put your company at the centre of the business. You must ensure that a suitable Co-Founder Agreement is in place, each team member is involved under an Employment or Consulting Agreement and a non-disclosure agreement (NDA) is readily available to protect your business information when talking to others. Additionally, you must ensure that your company owns the intellectual property (IP) being created by or for the business as investors will carefully scrutinise where the value lies. 

Raising funds from UK tax domiciled investors will inevitably require you to comply with the SEIS/EIS tax regime as the incentives provided to investors are generous and in effect render non-compliant start-ups almost uninvestable. When offering your company’s equity to investors, it is advisable that you understand the Financial Conduct Authority’s (FCA) restrictions on marketing ‘non-readily realisable’ securities and implement in your communication the relevant Investor Disclaimer forms. 

Last but not least, preparing in advance a favourable for your company Term Sheet (a non-binding agreement that contains all the essential points related to the investment) and later a Shareholder Agreement accompanied by a Warranties and Disclosure Schedule that is not too onerous or irrelevant to the size and nature of your business will help you strike a deal on your terms or at least put you in a better negotiating position. Depending on your stage, you may need to amend your Articles of Associations especially if you adopted the Companies House Model Articles which are perfectly fine at the initial stage, but may not be suitable once the company starts growing and gets on board investors and non-founder employees. 

If you wish to find out more about the legal steps that are relevant to your business and that you need to prioritize, contact us for a free friendly chat. There is no obligation to purchase anything, just a friendly chat and some general information for you to take the right direction.