Prepare yourself for the process with Osborne Clarke’s top 10 tips
As advisors to a range of companies seeking VC investment, we see the same issues crop up time and time again as founders seek investment before they’ve got their houses in order. So how do you avoid these issues and make your deal run as smoothly as possible? Read our top 10 tips on how best to prepare for a fundraising below.
1. Due diligence
Before you even begin talking to investors, start to collect scans of your key documents and organise them in a clear, logical folder system. If you can pull this together early, you’ll be able to identify and address or explain any gaps or issues before you get too far down the track with the investors (at which point those sorts of issues tend to be more disruptive).
2. Intellectual Property (“IP”)
It is critical that you either have – or obtain – an express written assignment of all IP created for the company. This can be through an IP assignment provision in an employment contract or a separate IP assignment agreement. Do not rely on an implied understanding that the IP was created for the company – the assignment must be in writing. If you can show you are on top of your IP, it will be much easier to gain an investor’s trust and confidence (and support).
3. Statutory books
Make sure you know where your statutory books are (or, if they are lost, reconstitute them) and make sure that they’re up to date. If you are unsure about what records you need to maintain or how to update them, speak to a lawyer (rectifying mistakes in the registers may require a court order, so it is important to get this right).
4. Companies House filings
Make sure your Companies House filings are up to date and the filings which have been made are correct in advance of the fundraising process. As part of the due diligence process, the investors will be comparing what they discover on the public registry with what is in your statutory books. If they don’t match up, you’ll need to explain why and rectify it before the investment round can be closed.
5. Managing your existing stakeholders
Consider what consents may be required from existing shareholders and how you’re going to deliver them in order to complete the transaction. Get legal advice about this early on in the process and remember that the company will almost certainly have confidentiality obligations to the investors.
6. Employee and Founder Equity
Whilst investors are frequently happy for an option scheme to be implemented within a few months of closing the investment round, they will often want you to agree to key terms before they invest. An institutional investor may require the founders to “vest” or “re-vest” all or a part of their equity, and may require you to give up your vested equity if you leave the company. Be prepared to have these conversations.
7. Term sheets
The first document you’ll be asked to sign as part of the process is a term sheet. Once something has been agreed in a term sheet, it is difficult to renegotiate and, even if not legally binding, it is binding at least in honour. We recommend that you always seek advice from a lawyer (or someone experienced in VC fundraisings) before you sign the term sheet so that you understand exactly what you’re being asked to agree.
8. Roles and responsibilities
You should decide with your co-founders or management team who is going to focus on the fundraising, and who is going to run the business during that time. Give someone primary responsibility for dealing with advisors and investors and for agreeing the deal. There will be times when everyone’s input is needed, but make sure that someone is focusing time on the business.
You should also agree a clear, achievable timetable with your investors and the advisors on the transaction. Set deadlines with the investors for the delivery of long-form documents (which will generally be prepared by their lawyers) and the completion of their due diligence.
Finally, start talking to advisors – in particular, accountants and lawyers – early. They will help you navigate the process, tell you what to expect and be on hand to help you sort out the issues which will invariably arise during the course of the process.
Tips from an Entrepreneur [Andrew Mulvenna, co-founder Brightpearl, Notion EIR]
- Get customers & revenue first – prove traction, and understand your unit economics before presenting to investors. Take as little money as possible early on, to test the project, then seek as as much growth capital as you can. Value every penny once you have it
- Closing your first round is a complex process with lots to learn that will alter the future of your business for better/worse, so seek advice from people with hands-on experience. Find a great lawyer with VC experience, and also look for a at least 1 mentor/advisor from your own network who can coach you on what a good venture deal looks like. Whilst negotiating our £1M seed, a former VC and founder of a start-up accelerator, became our personal advisors/mentors. Their advice gave me knowledge/confidence to negotiate important changes to terms
- Finally, It’s not just about the valuation… it’s worth a few dilution points to have the right team, so ensure alignment in goals and values. Wrong investors can waste valuable time and derail businesses. Do what investors do to you – due diligence. They will be asking questions of you, and you should be asking questions of them. What are they like, what questions do they ask, how much of their fund is invested, how long to close, what was the follow-on like?
Article produced in partnership with Mathias Loertscher at Osborne Clarke.