Like a job interview — the key to attracting investment opportunities is all in the preparation. It’s a given that you have a business idea and functioning company but, unless you’re in the fortunate position where investors are badgering you to take their money, then you should find these pointers useful. Whilst some of these suggestions may seem obvious, it is common for entrepreneurs to get so bogged down in the detail of running the company that they quickly forget what an investor values (as well as your passion and business ideas).
Imagine that you and your two Uni friends have developed and own a fantastic publishing company, “Rainbows & Clouds Ltd”, operating in the education sector. The head office is in a converted warehouse located by London Bridge which you personally bought. You’re the writer, Jo is a child psychologist with lots of client contacts and Mark is a former primary teacher.
A year later, you’re doing well and decide to give away some shares in the company to your four key employees to incentivise them to stay. You would like to extend your premises and hire some more assistant writers and you’re looking to third party investors to fund it. Here are some questions you may encounter….
1. Please can we review your shareholders’ agreement or any documents setting out the rights of each of the shareholders? A shareholders’ agreement (and/or articles of association) can be used to set out definitive rights of different types of shareholders to provide certainty from the moment you become a shareholder. For example, the founders may receive A shares with rights to monthly dividends and voting whereas the employees may receive B shares with a lower ranking right to dividends on an annual basis. Investors will likely be impressed that you have sought to professionalise your business by agreeing these key rights from the outset.
2. We really like your company name, its design and logo, do you have any trade mark protections? Not all logos/company names will be distinct enough to be capable of registration as trade marks/other forms of protection but, if they are, this is a way of adding value to your company and protecting the company from third party infringement. Where you have registered intellectual property, ensure that you maintain such registrations.
3. Why is your website registered in the name of one of your employees? An investor will expect the company it is proposing to invest in to either (i) own the assets it uses or (ii) have a licence in place permitting use. Ensure that the company owns its assets and contracts and that they are not owned by its directors/employees personally.
4. What are the terms of employment for the founders and employees? Whilst you may have overlooked entering into service contracts when you set up the company, there will still be terms under which you are engaged/remunerated. We recommend entering into formal written contracts on or before seeking investment which can be shared with prospective investors. It is common for directors/shareholders to have more bespoke service contracts with e.g. longer periods of notice. For the company’s employees, we advise having one standard form employment contract which can be personalised per employee, this makes it easier to monitor employee arrangements/implement changes going forwards.
5. Do your premises have planning permission to operate as an office? We recommend checking that you are not in breach of any planning rules/restrictions in respect of the head office. Real estate disputes can be costly, and investors won’t want their monies to be wasted on factors such as these which will not directly improve the company’s profitability.
6. Please can you provide copies of key customer contracts? It can look unprofessional if you haven’t kept copies of customer contracts which form part of your revenue stream, so we recommend obtaining copies and filing them securely. Investors will want to check if, as a result of their investment, customers may have a right to terminate i.e. if change of control rights will be triggered
7. How do you ensure your company complies with data protection laws? Given the sizeable fines being handed out by the Information Commissioner’s Office, more and more investors are taking a harder stance on data protection breaches.
8. What cyber security practices do you have in place to protect your company from loss of data? With cyber-crime on the rise, investors will want to know that any company intellectual property/confidential data is managed and stored securely
9. What percentage of your existing shareholding are you each willing to give up? Before offering a response, consider/get advice around the tax consequences, for instance, if you are seeking entrepreneurs’ relief, certain conditions will have to be met e.g. you will have to hold at least 5% of the voting shares in the company. Entrepreneurs’ relief operates so as to apply a rate of Capital Gains Tax of 10% to qualifying gains up to a lifetime limit (currently £10 million). In the absence of this relief, gains are taxed at 10% to the extent that the individual’s taxable income for the year falls below the basic rate band upper limit and 20% on the balance.
Please can you explain the company’s financing, is any debt secured against the property/company? Investors will expect you to be in a position to explain historic financial data and to have forecasts in place taking into account economic/political changes. Ensure your accounts/metrics/forecasts are accurate and that you are aware of any third party security. You should check if any consents are required by third party financiers before accepting investment monies.
Please contact the Trowers’ team for more information. We have also produced a series of fact sheets to help you, so click here to access our online resources.