Start-ups and fast growth companies can fundraise quickly and painlessly, but, as LegalEdge’s Becs Le Flufy knows from experience, it’s often not the case.
Becs said:
“All too often companies go into the fundraising process underprepared and end up paying a heavy price – when what could be an efficient, frictionless process becomes mired in delays, frustrations and unexpected costs. I’ve seen companies make the same mistakes again and again – usually things which could be easily fixed by a bit of advance planning.”
Becs shares her top hazards to avoid.
1. Cap table/ statutory books and/or filings incomplete /not up-to-date.
Any investor will need to see your cap table to understand your ownership structure, so it’s crucial it is accurate and up-to-date. Even more importantly, it must match your register of members and Companies House records, and you must have the documentation to evidence any share transactions such as share transfers, splits, issues, etc. Otherwise, it’s a complex and time-consuming exercise to try and track historical transactions. And – this is key – no investor will complete a funding round without clarity on it. See our blog: Start-up legals: what not to F* up!
2. EMI/share options schemes not set-up or managed properly.
To qualify for the tax treatment, these schemes must be properly set-up. It’s all but impossible to correct mistakes after the event, and if the scheme is not EMI qualifying, your company may be asked to make up the difference (in the lost tax savings) plus HMRC payments/ penalties. This is an area where you need to get proper advice early on. Don’t scrimp / use cheap solutions/ platforms, etc. See our blogs: Why EMI is still the best option for growing businesses and Dos and Don’ts of EMI options.
3. Missing/unsigned documentation.
Not having the key contracts, resolutions, etc signed by all parties and easily accessible for inspection can be problematic. If you can’t lay your hands on properly executed key contracts (for customers, suppliers, staff, etc) it will delay a due diligence process, and the deal closing, or could even stop it from happening . See our blog: Legal debt (or the cost of putting things right later)
4. Messy/unclear IP rights.
Have all your key IP rights been properly protected? Do you know for sure who owns your IP? Are staff assigning IP they create to your business correctly? For example, there can be issues if you have overseas staff and are using an Employer of Record (EOR). Same for freelancers, contractors, etc. Also, how are open-source licences and AI solutions being used? Where IP is a key asset, any issues with ownership can lead to a direct chip to the valuation, or even stop a deal from closing. See our blog: Why scaling companies should prioritise an IP audit.
5. Unsuitable/ missing contracts/ compliance for senior staff.
Off-the shelf / template contracts won’t cut it with investors, who want to know that key and senior staff have the right benefits and restrictions (e.g. enforceable non-solicit/poach, garden leave clauses, etc.) to protect the business. Also, that staff have been hired compliantly (with any necessary visas etc) and had appropriate training to avoid management issues. See our blog on Hiring and incentivising staff when expanding into new markets and our case study on Dealing with people issues whilst navigating employment legislation.
6. Unclear employment status (IR35, EORs, etc).
You can’t call people contractors/ freelance/ self-employed if they’re actually likely to be classed as employed by HMRC – HMRC will come after you for unpaid income tax and NICs. Be aware if IR35 applies to you. Also be aware of the risks of using EORs, they are not failsafe and come with different risks (e.g. the ability to have IP assigned, enforceability of non-solicit/poach covenants, confidentiality clauses, etc). You need to understand the employment status of your workers and be able to justify it to potential investors who may be nervous about unknown liabilities. See our blogs: Are there legal or tax risks to using contractors? and How to hire globally and compliantly.
7. Ongoing compliance failures (such as data protection legislation, pension rules, etc).
Certain areas, like data protection, pensions, etc. are highly regulated so make sure you don’t miss things or get them wrong. Like tax, these are areas where getting some decent upfront advice will be worth it – fines from regulators can be significant and those, together with the legal risks of non-compliance can spook potential investors. See our blog: What is a ROPA and why do you need one?
Finally, Becs told us:
“These are all areas which need to be addressed by companies eventually – whether or not they are seeking to raise funds right now or contemplating an exit in the future. So, while fundraising might be a catalyst for getting your house in order, it’s best to get on top of and invest in good housekeeping sooner rather than later – you don’t know what opportunities are around the corner, and won’t want to be slowed down by company “baggage” when your business needs to move at pace.”
Can we help?
If you want to discuss how we can help ensure you get these basics right get in touch on info@legaledge.co.uk. We also offer a Cap Table and Corporate Document Review (see here), and also a free Trade Mark Review, so if you’re not sure if your brand is protected or think your current documents aren’t fit for purpose let us know.
