The Legal Process Of Raising Funding For Your Startup

Raising investment for your startup is a lengthy, time-consuming, complicated and yet indispensable and exciting process. It can also be confusing about the order of events in obtaining funding, so we have put together a step-by-step account of what to expect on your journey to investment.


Step 1 – Preliminary Steps

Unless you have magical powers, an investor is unlikely to want to invest in you on a hunch, and is more likely to be expecting to see both the ‘headlines’ and a detailed explanation about your business. Many people will say that writing a business plan at the outset of the business is essential, but it may be that in practice you just started trading without spending months refining your strategy. However, when it comes to getting investment, a business plan and other documents are essential ways to communicate your company as an investment opportunity investors shouldn’t miss out on, particularly as they will be inundated with requests for investment. So, what should you prepare before you start to approach investors?

Correct legal structure – it is worth noting that you can’t give away shares in your business in exchange for investment monies unless you have a legal entity with shares, i.e. a private limited company. So, if at the moment you are operating as a sole trader, or you haven’t started trading yet but intend to seek investment in the future, you will need to incorporate as a company and transfer all property owned by the ‘business’ into the company name. See our post on choosing a legal structure for your business here.

Executive Summary – this is the written ‘elevator pitch’ for your business. Investors should want to read more but not be left wondering what the core of the business is.

Business plan – this is the detailed case for your business, which will include your market research, any traction to date, financial forecasts, the amount of investment being sought, and for what.

Presentation or ‘Pitch Deck’ – sometimes you will send this out as reading material and sometimes you will be standing up and presenting it, so prepare two versions tailored to your audience/ reader.

Share capitalisation table – you may need to draft the help of a solicitor to help prepare your share capitalisation table. This will set out the structure of shares for your company before and after investment.

Create a list of target investors – this is for your own benefit, not investors. Research the investors you are going to approach and create a list of your ideal investors and tailor your documentation to their criteria.

Network – this is not a legal part of the process but it is an essential aspect of getting investment. Try to reach out to connections in your network who may either be able to introduce you to potential investors, or who will be able to advise you on the process along the way and review your documentation. Your solicitor will have lots of contacts with experience in the various elements of investment, so you should see how they can help you beyond assisting with the documentation.

So, you’ve found someone. He/she/they are interested in financing your project, but what do you need to do next to actually ensure that the funds reach your bank account, and that your investors are happy?

Here’s what’s usually required for you to do once you’ve received an initial offer for investment or an investor has expressed an interest in pursuing investment.

Step 1 – Preliminary Steps

Due diligence is the term given to the investigatory work done around a transaction such as investment where the investor conducts detailed research into the financial, corporate and contractual status of your company. Your investors will usually make a preliminary request for you to provide documents which will include your corporate information, budgets, forecasts, key supplier/ customer contracts in place, employees and employment contracts, schedule of intellectual property, a schedule of property or leases, a list of equipment owned by the company, details of other investors, shareholders, and bank loans, any existing or future litigation, tax and VAT filings and insurance documentation, and, if applicable, your data protection policies.

“VC’s reject most startups because they are not in the preferred industries, have not displayed the proof of potential, have not been referred by the right person, or any one of many reasons.”

– Dileep Rao

Step 2 – Due Diligence

Due diligence is the term given to the investigatory work done around a transaction such as investment where the investor conducts detailed research into the financial, corporate and contractual status of your company. Your investors will usually make a preliminary request for you to provide documents which will include your corporate information, budgets, forecasts, key supplier/ customer contracts in place, employees and employment contracts, schedule of intellectual property, a schedule of property or leases, a list of equipment owned by the company, details of other investors, shareholders, and bank loans, any existing or future litigation, tax and VAT filings and insurance documentation, and, if applicable, your data protection policies.

Step 3 – Term Sheet

The term sheet sets out the terms on which your investor is going to give you funding, be that by taking equity in your company, a convertible note, or another arrangement. It will also set out any conditions you will have to meet in order to successfully gain funding. It will also include decisions about dilution of shares and decision making rights. The term sheet is not necessarily a legally binding agreement, it is just the headline terms of the long form documents listed in Step 4 before the parties go through the more minor details.  The term sheet can be prepared by your side or the investor’s, but in either case, it is important to seek advice from a solicitor to ensure that you understand each term, but also so that your solicitor may negotiate the most favourable terms possible on your behalf.

Step 4 – Long Form Documents

Once the headline terms have been agreed and the due diligence has been completed, your (or the investor’s) solicitor will start to prepare the long form documentation which will implement the funding arrangement. The following documentation will usually be involved:

Shareholder’s Agreement or Investment Agreement- this will set out the agreed terms in the term sheet in more detail. Future investors may want to see this agreement to know how much control other investors have in your company.

Vesting Provisions (these may be drafted into the shareholder’s agreement) – vesting provisions are usually designed to protect the investor or major shareholders from key members of the founding team leaving the company soon after investment, meaning that certain shares will ‘vest’ over time or upon meeting certain milestones.

Subscription Agreement – this agreement is the promise of your business to sell a certain number of shares to the investor at a certain price, and the agreement of the investor to pay that price.

Articles of Association – the articles govern the operation of the company once it has received the investment.

Step 5 – Closing Date/Receive Cash

Once all the specific conditions of investment have been met, the documents have been prepared and terms agreed, a closing date will be scheduled for the signing of the agreements and the transfer of the shares and funds. Congratulations – you have successfully secured your first round of funding.

99.95% of entrepreneurs will not get VC funding for their startup

Step 6 – SEIS/EIS

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are tax reliefs for early stage investors purchasing shares in certain qualifying companies and are designed to encourage investment in startups. There are different rules on qualifying for each scheme, so you should seek the advice of a solicitor before you raise money to ensure that your company will meet the criteria, making you more attractive to investors. Before the investor can claim tax relief on their investment in your company, you will need to request the correct form from HMRC and demonstrate that your company meets the criteria. However, it is also possible to submit plans to the SCEC in advance of raising money, and the SCEC will advise on whether the proposed issue will qualify. Saying that you are eligible for EIS or SEIS and then not actually meeting the criteria may lose you your investors, so make sure you seek advice early on for how to meet these.

Step 7 – Accounting & Administration

Immediately after securing your investment, your solicitor will have some initial housekeeping to arrange, which includes issuing share certificates, updating the company’s share register and registering with Companies House.

However, it doesn’t stop there. Once you have external investors, your accounts and bookkeeping will need to be in immaculate condition and completely up to date. You will probably also have reporting obligations as part of your investment terms so at any given time you may need to report on the financial health of the company.

Let Us Help You Get The Legal Advice You Need So You Can Raise Funding For Your Startup.