Small Business Research and Enterprise

By Michael Buckworth, managing partner at Buckworths

Raising investment is one of the most significant milestones for a startup. Done well, it can fuel rapid growth, bring in valuable expertise, and open up networks that propel your business forward. Done poorly, it can drain time, dilute founders unnecessarily, and saddle the company with complex structures that deter future investors.

Here are four top tips from Michael Buckworth who is the managing partner of Buckworths, a firm of solicitors working exclusively with startups.

1.          Identify your target investor

For your first round, you will likely be looking at three types of investor:

• angel investors – these are typically high-net-worth individuals who invest their own money. Angels are usually looking for two things: a business that will grow and scale so that they exit at a multiple of the value at which they invested; and tax relief;
• early-stage funds – these are smaller funds that specialise in seed or pre-seed deals. They will look for traction, a clear market opportunity, and a scalable model. Their investment may be conditional on the startup qualifying for investor tax reliefs; and
• venture capital (VC) funds – more active in highly scalable tech and related sectors, VCs tend to invest larger amounts with more strings attached. Most will invest only once there is traction.

So which type of investor is best for your business? Ultimately that’s a decision for you based on your aspirations for growth, how quickly you want to raise and how much control you are prepared to give away. Funds tend to move fast; push harder on valuations and want more control. Angel rounds can be slower to put together but may be on more founder-friendly terms.

2.          Qualify for SEIS and EIS if targeting angels

The UK is fortunate to have some of the world’s most generous tax relief schemes for early-stage investment. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) reduce the risk for individual investors by offering:

• income tax relief as a credit for investors against their income tax liabilities; and
• a tax-free exit,

in each case subject to both the company and the investor meeting certain requirements for the period of 3 years following the date of investment.

Most startups will qualify for the schemes, but:

• property holding and development businesses, asset rental businesses, banks and businesses primarily exploiting third party intellectual property don’t qualify; and
• startups that are heavily reliant on AI to build their code and core assets and businesses paying significant sums to licence in IP should seek specialist legal advice before applying for tax relief as there are some traps for the unwary.

The first step in showing that your startup qualifies for the schemes is to apply to HMRC for an “advance assurance”.

3.          Tell your story in an engaging way

Investors see hundreds of decks and hear countless pitches. The ones that stand out tell a story that is memorable and compelling. An engaging pitch should cover the problem, the solution, your team and your vision. Numbers, forecasts, and models are important, but at the earliest stages investors are buying into the founders and their story. Practice your pitch so it is natural, confident, and adaptable depending on who is listening and try to find a way of exciting, amusing or challenging your audience.

4.          Keep the structure simple

At Buckworths we work on hundreds of investment rounds each year. Most are either priced rounds or use an advance subscription agreement (where investment monies are paid today and shares issued later, usually 6 months later or on the startups next investment round). More often than not, excessively complex structures are a red flag.

The common request from an investor that I would always push back on is to allow the investor to invest in tranches at the same valuation. By allowing this:

• you de-risk the later tranches of investment – which is unfair to other investors;
• you lose the ability to increase your valuation as revenue increases; and
• you expose yourself to cashflow challenges if they fail to invest any of the tranches.  

Conclusion

Raising investment takes time and focus. Choose your investors as carefully as they choose you – because the right capital, at the right time, from the right people, can make all the difference.

About Buckworths

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