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Legally Preparing for Investment

Funding is a crucial factor in any successful start-up’s story

Many fashion start-ups seek out investors in order to grow their businesses, but there is a lot that you need to know about as part of preparing for investment. Tahir Basheer of Sheridans law firm has some key information that you need to know.

Funding is a crucial factor in any successful start-up’s story. An injection of cash can provide the additional working capital that gives a start-up the platform to scale in a way that would not be possible with its finances alone.

Raising money is something many aspirational start-ups may have to prepare for. Funding might come from a personal contact (if you are lucky!) or a third party investor. Before you seek out investment you should ensure the business is in tiptop shape.

Every business will have its own individual needs and quirks; however, there are certain legal considerations when preparing for investment that are common for all:

Choose the right corporate vehicle

Most investors will want to receive shares for (at least part of) their investment. They will be familiar with the private limited company structure, and other corporate vehicles may be less attractive (e.g. limited liability partnerships).
Setting up a private company is cheap and can be done almost instantaneously if you purchase an off the shelf company.

Get help

Getting the right advice early on in relation to the business structure is important so as to ensure no problems with tax planning arise, essentially making the company more investor-friendly. Most investors will be more incentivised to invest in a company if it is, for example, EIS (Enterprise Investment Scheme) and/or SEIS (Seed Enterprise Investment Scheme) ready.

These schemes are designed to help small to medium-sized companies raise finance by offering a range of tax relief to investors who purchase new shares in those companies.

Pre-investment shareholdings

You should make sure these are correctly reflected in the company’s statutory books and also at Companies House. Make time for (boring but important) administrative tasks such as these.

You should be wary of any verbal promises of shares made to employees, contractors or interns as these create uncertainty as to what shares are with who.

Written employment contracts and consultancy agreements

Investors will want to review your employment contracts and consultancy agreements as part of their due diligence. Make sure these documents are in place and contain clauses relating to intellectual property (assigned to the business).

Read Tahir’s advice on employment contracts here.

Written agreements

It isn’t just written employment agreements that you should have in place. Investors will expect to see copies of written agreements with all key customers, suppliers and revenue streams.

Ideally, you will have your own standard terms and conditions which are used. However, don’t fret if you don’t use your own terms, as investors are often pragmatic and see one-sided written contracts as being better than nothing at all.

Confidentiality

It is essential to have confidentiality agreements and non-disclosure agreements in place for your investors. This will send the message that you are the real deal and mean business. Timing is important here – a confidentiality letter with investors should be signed as early as possible in any potential deal. Experienced investors will be expecting this so don’t be afraid to ask.

You should also have confidentiality agreements with employees and consultants (these should be in employment contracts) but it is sensible to remind staff of these obligations.

Due diligence

Investors will want to investigate the nuts and bolts of the business thoroughly prior to any deal. This can be lengthy and a fairly arduous process. You should anticipate what investors will want to see and collate them in a single place in a logical indexed format. Preparation is key!

Make sure key financial documents are kept up to date. Keep a record of everything you have supplied to the investors and mark all confidential information as such. Don’t forget to check that the domain names and any registered ‘Intellectual Property Rights’ are registered in the company’s name and not a third party’s name.

Timeframes and managing an investment round

It is important to understand the time and effort it can take to raise finance. A typical investment round is likely to last around three to six months from start to finish (although everyone always tries to make them shorter).

The process can also be very distracting for management and it is important for the business to pick the right internal team to lead the investment, rather than having all of the management team involved.

Don’t forget that you have a business to run while you are trying to raise the money (and remember not all deals reach completion). It is also worth having lawyers and accountants who have had experience of working on investment rounds, as that experience will be crucial in managing and finalising the deal process.

Changes to agreements after the investment has been finalized

Once you have taken someone else’s money and given them shares in return, you have to brace yourself for the fact that you now no longer run your own business. You now work for your shareholders, some of whom are your investors!

As a result, the investors are likely to want at least one seat on the Board and a veto on key business decisions. They will also likely have a right to regular financial information so that they have full transparency on the monies coming in and out of the business, and future projections around that.

But how to find the right investor for your business? Read here.

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