By: Karen Holden
Karen Holden is the founder of A City Law Firm Limited, an award-winning legal 500 practice, and she is passionate and committed to helping other female founders achieve success and recognition in their fields. Recently, she launched the Female Founders Growth Program, which focuses on bridging the gap in investment between male and female founders, and teaching women the skills they need to secure funding.
Many founders believe the first step in business is finding investment. However, there are many steps that need to be considered before attempting to secure funding. Common feedback from investors include that women do not ask for enough money, the pitch lacks information and confidence, and the infrastructure is not in place to warrant investment. This is a sign that founders are approaching investors too soon, which also means that their valuation and financials do not add up and there is no legal documentation to offer security for the investor.
Before seeking investment, consider the following, which are often overlooked:
1. Is there free money that you could apply for first, for example grants, R&D tax credits, patent box, and more.
2. Are you ready to pitch? You must have a sound business strategy and a plan for the investment money. Furthermore, your confidence and ability to deliver the pitch is essential, so practice your pitch as much as you can – preferably in front of other people! Ask your friends and family to be your audience so that you get used to presenting for others.
3. Is your brand, invention and trademark protected and persuasive for investors and customers? Do you fully own all the intellectual property? This is vital, as it is your collateral.
4. How do you get your foot in the door? You need to know what you want, and how it aligns with what they want. You also need to understand and be prepared for the due diligence process.
What are investors going to look at and what are they going to ask you? In our experience, female founders tend to be underprepared, which can jeopardise the deal. Each round of investment is different but here is a general checklist to go over before you pitch:
These are the crucial steps you need to cover before moving forward with your preparations:
- Ensure your business is legally sound before you seek investment. Identify red flags early, so they are not found by the investor and gives them cause for concern.
- You will likely be asked to make warranties and disclosures, so make sure you understand your responsibilities.
- Do you have any contracts or promise letters to stock your product, or for somebody to develop your product? These are persuasive and will help move the talks forward.
- Do you have a cap table/term sheet/valuation?
- Is your trademark portfolio ready to provide to the investor, along with proof of any patents filed? Can you evidence ownership of your intellectual property, if created by a third party?
- Are you on the SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise Investment Scheme) and if you are, has this been carefully documented, including how you have spent the money in accordance with the protocols? If you are not, why not and do you qualify?
You will be negotiating terms, which will likely be incorporated into a shareholders’ agreement and other transactional documents. Make sure you have considered the following:
- What are the parameters of what you are willing to agree or compromise on?
- How much control are you willing to give away?
- Do you understand drag along and tag along terms that are essential for you controlling future share transfers or sales? Do you understand how you will later be diluted?
- If you want to leave or another shareholder leaves, what exit terms can you agree to protect the business?
- Will the investor have a seat on the board, and if so, what will they be able to vote on?
- Are you accepting passive money, or is the investor offering you more? How are you confident they will deliver?
- Will your directors’ loans be written off? You need to carefully consider how you approach the investor and tax structuring issues and how you make the transaction beneficial for you.
- Think about your exit plan as well as the investor’s exit plan. How long are you tied in for, and do you have the right to sell your business?
Consider your infrastructure
You need to have the infrastructure to be able to use any funds provided, so be prepared to answers these questions:
- How are you going to recruit?
- Who is going to develop your technology?
- Do you need commercial property?
- Who will run your business while you are running the development aspects?
- Who will sit on your board of directors?
- How will your valuation and financials be updated?
- Are your employment/sub-contractors’ agreements robust and signed? The investor would want to ensure confidentiality so that your trade secrets are secure. Do you have restrictive covenants that prevent employees from setting up in competition or working for a competitor?
Tax advice is essential throughout the entire process. The more tax efficient and structured you are, the less tax you pay in the future. Cash flow will be an issue for many businesses, so getting money out of the business and how you buy out others to move forward is something to consider.
Knowledge and confidence will help you break down the barriers to securing funding
This is just a flavour of the many aspects we consider with founders. There is sometimes too much information out there, which can be overwhelming, so we try to consolidate everything to make it is as easy as possible to implement.
During the launch day of the Female Founders Growth program, 7 females pitched their businesses to an investment panel. We are excited that 3 are close to securing investment and two of them are being asked to accept more!
Karen Holden founded A City Law Firm 15 years ago with £5000 and a suitcase of files. The recession caused serious cash flow issues, which she had to resolve before scaling. She did not seek investment but instead opted for debt finance, which was unusual for a female founder. It meant she could successfully scale her business as a 100% shareholder. A founder can grow their business in many different and alternative ways, it is just a matter of finding them, and then having the confidence and knowledge to pursue them. Make sure that you are prepared when you seek investment, and do not take no for an answer! Keep trying until you find a good option for you.
If you need further advice or support related to seeking funds and investment, get in touch with A City Law Firm.
Phone number: 020 7426 0382
*We strive to do our best when supporting small business and their growth. Our business databases can give you information and data that can help you with advertising, market research, company information, and industry factsheets. If you have already taken the plunge, we would love for you to join us at a seminar, our workshops cover digital marketing, business model canvas and planning, demystifying taxes and intellectual property to name a few. Visit our events page or website for more information.