Most advisors have a cost… sometimes a rather large one. So can a cash strapped start up or early stage company justify paying out advisory fees and if so, how can you get best value?
You want to build your company, maintain control and earn a fair share. Investors want a profitable return, with minimal risk, and therefore often seek operating control. It is a delicate balance.
How to choose a lawyer when raising finance?
Choose a lawyer who represents companies as well as investors as they will understand both sides. Has the lawyer represented companies which are similar to yours? What were the challenges?
Asking these types of questions will guide you on whether your prospective lawyer is proficient and creative in dealing with major issues.
Investors will scrutinise the financial stability of your business, commercial agreements, your company’s articles and shareholders’ agreement which address issues such as a future dilution of equity and new share issue. So it’s a good idea to get legals on board early on.
Why you need a lawyer when raising finance?
A lawyer will draft, review, and negotiate all the documents that you’ll need. Getting your term sheet together is a significant milestone but it is just the start of a complex process. Negotiations be complicated and it’s best to make sure that your interests are represented.
Due diligence can often be a confusing and drawn-out process and your legal team can help maintain focus. Each deal is different and plans, processes and bottom-lines change.
All too often deals end up focusing on the negative details. It’s the legal documentation and contracts which usually soak up the majority of time and expense. This can be exasperating when you want everyone on the same page. Everyone wants the business to flourish, but here you are negotiating about what to do when everything falls apart.
Legal advisors can also help untangle tax and accounting issues which will arise depending on whether your finance is to be provided through a share issue or via a loan which is a debt.
Guidance on compliance and shareholder approval is also key. There are various shareholder resolutions that may be required to validate the issue of new shares in return for financing. There are strict rules for obtaining shareholder resolutions if they are to be valid and enforceable.
Companies Act requirements also regulate the filing of charges over property taken as security for a loan. So you want to ensure that you are compliant with Companies House filing requirements within the necessary time limits.
HMRC often request an inspection investment documentation relating to financing so it is ever more important to structure matters correctly and record decisions taken by directors who must relying on well drafted documentation in order to perform their duties properly. Directors who skip over this requirement may discover they have created a range of actions which could be brought against them.
At Linkilaw, we have fundraising experts that will support you and your business through every stage of your legal needs. Book a call with our legal team, we’ll take care of your legals so you can stay focused on growing your business.