Our live Zoom Dives bring creative business experts together in conversation with our founder, Carolyn Dailey, to tackle some of the most urgent topics currently affecting entrepreneurs and freelancers as a result of the COVID-19 crisis.
For this edition, we were joined by startup funding expert, Isabella Ghassemi-Smith, Ecosystem Manager at SeedLegals. Isabella lifted the lid on the crucial legal aspects that founders need to master when they're seeking funding.
Read on to discover the key takeaways, or you can listen to the discussion in full here.
Before approaching investors:
You MUST have a founders' agreement in place. This is a document setting out your rights and responsibilities as a founder. It's designed to protect yourself. Within the agreement you should:
- Include a share vesting schedule - a time-based agreement that states that you have to give a certain percentage of your shares back to the business if you leave before an agreed upon amount of time – this is usually 3 years.
- You need to protect yourself as a founder from your co-founders
- It doesn't matter how trusted your co-founders are. Accidents can happen that can change circumstances and prevent founders from being able to fulfil their responsibilities, so make sure you're protected.
- Prepare for your worst while you’re at your best
- Investors don’t care about your relationship with your co-founders. They want to know that their funds are protected, so they will expect to see a share vesting schedule in your founders' agreement.
- If you don't have one of these, you won’t look organised or like you know what you're doing, so you'll be much less likely to receive investment
- You never know what financial situation your partner’s in, so always protect your own
- Protect your intellectual property - this is everything that makes up your business, from your website, to the design of your emails and newsletters, to brand presentations
- Your IP assignment should state that you own the rights to any content or design elements of your business
- If you hire contracts to do certain jobs, eg: to build your website or design the look of your brand, make sure they sign an agreement giving you the rights to them
What are SEIS and EIS funds?
SEIS - Seed Enterprise Investment Scheme
- Run by HMRC, these schemes offer significant tax reliefs to investors in SEIS-eligible startups. These include:
- Individual Income Tax relief of 50% on up to £100,000 invested
- Loss relief (your at-risk investment multiplied by your tax rate)
- No Capital Gains on the sale of shares held for at least three years
- They spread the risk of investing in early-stage companies by investing in a large portfolio of these ventures
- Available to companies who have been trading for less than two years, have fewer than 25 employees and have no more than £200,000 worth of assets
- They're high risk investments
- 80% of all angel investment portfolios are made up of SEIS and EIS funds
EIS - Enterprise Investment Scheme
- Run by HMRC, these too help younger, high-risk businesses raise investment by offering investors tax reliefs. Through the scheme you can raise up to £5 million each year
- You MUST follow the rules of the scheme for at least 3 years after the investment is made, otherwise your investors won't receive their tax reliefs
- Investors can get up to a 30% tax break
- The money raised by the new share issue must:
- be spent within 2 years of the investment, or if later, the date you started trading
- not be used to buy all or part of another business
- pose a risk of loss to capital for the investor
- be used to grow or develop your business
- Used to give companies a guarantee that any R&D claims will be accepted if they are: in line with what was discussed and agreed, claimed within the first 3 accounting periods.
- You should apply for Advance Assurance as early as possible. You will need:
- Your company accounts
- Your company registration documents (from Companies House)
- HMRC correspondence
- Previous company tax returns (not needed for new companies)
- The name of a contact with a direct knowledge of your R&D to discuss the application with HMRC
- Investors will ask for your SEIS and Advance Assurance upfront, so get them done early
When speaking to investors, you should have two pitch decks:
- Shorter pitch deck
- Outlining who you are, what you do, why you do it and how
- Are you solving a problem? Will investors understand the problem that you're solving?
- This should be sent out when you sign up for an accelerator programme, or when you reach out to VCs who want to hear from you
- Longer financial deck
- Detailing your financial predictions, revenue model, business model - all of the key data
- This should only be shared with serious investors – as it contains such key information, you can end up being taken advantage of if you just 'share it around'
- Interested investors might think you don’t know what you’re doing if you’re leaving yourself vulnerable by sharing your full deck with everyone, so don't put them off
The funding round
- Keep your share class simple
- Pre-emption – this allows you to buy back your original share percentage if you’ve been diluted and end up with a smaller share
- Corporate governance - keep this simple, and avoid holding board meetings as much as possible. They're time consuming and a headache to plan, so keep these quarterly, maximum. If you want to communicate with your investors regularly, do this via a newsletter.
- Share vesting - this is the process by which an employee, investor, or co-founder is rewarded with shares or stock options, but receives the full rights to them over a set period of time. This is usually three years.
- SeedFAST by SeedLegals - investors subscribe for shares in your next funding round in exchange for cash now. SeedFASTs convert into shares later, giving you time to grow your future valuation
- This enables you to raise funds ahead of your funding round, without a valuation, so you can build the cash you need
- You will likely have a higher quality funding round because you already have cash and investors
- SeedFASTs are SEIS/EIS compatible
- Founders are now raising funds 4 times as frequently as they used to
- When money comes in, don’t give shares to people – set up an EMI options scheme, which is a more tax efficient way to give employees options
The biggest mistakes founders tend to make
- Not protecting yourself as a founder by having a founder’s agreement
- Giving away too much equity too early
- Taking on the wrong investors – most investor/founder relationships last longer than most marriages, so choose them carefully
- Mis-timing your SEIS/EIS. Make sure you do your SEIS applications first. If EIS funds come in first, they annul your SEIS funds, so you could be liable to pay your SEIS investors their tax breaks
Where to network and find like-minded people/investors
- Warm intros - if you know someone who has recently raised funds, ask them to introduce you to their investor. This has a much higher success rate than going in blind, as there's already an element of trust established. They may not invest in you but they may know someone who will. So pay attention to other founders you know and to what they're doing!
- Ask an investor for their advice before you ask for their money. If your pitch deck is terrible, you want to know about it before using it to try to raise funds.
- Ask investors for their feedback, take the time to make improvements, then go back to them and thank them for their suggestions, show them how you have benefitted from them
- Do this several times for the next few months, show them how your business has grown and developed. In doing so you will develop a relationship of trust with them, so if you do come to ask them to invest, they will have more confidence that they're money is going to the right place.
- Asking for money is not the way to impress investors
- Use LinkedIn connections. Angel investors are often people you know but didn’t know you know them.
- Send a message to everyone in your network with your short pitch deck
- You never know who will be interested - don’t assume you know who the investors are
- Always look professional, even if it's just on Zoom. Have a nice background, make sure your camera and microphone are working properly, have good lighting, a strong WiFi connection, position your screen properly, wear a smart outfit.