In the fourth and final post in the series looking at how to simplify the investment deal process (following posts on term sheets, due diligence and the deal team), Kenny and Claire finish by taking a look at a range of other external factors that all need to be dealt with if you're running a business before your company gets the investors' money into the bank account.
In addition to all the commercial elements an investor will consider, the investee company’s eligibility for EIS Relief will probably be a material consideration. Some might seek HMRC “advanced approval” for eligibility. This is not simply a “tick box” exercise and may take up to three weeks. During the run up to the transaction, you will be juggling the demands of the deal process whilst continuing to grow the business. Help lighten the load and deal with this aspect well in advance.
Whether it is friends and family shareholders, a University or some other institution that has supported the company, their approval will probably be required and IP may need to be transferred or licensed from them. It will be up to you to manage them! Open dialogue with your legal advisers as soon as possible. They will clarify the key roles and requirements. With Universities, approval of agreements may need to pass through committees and there will be procedures to follow. Anticipate this and, with your adviser’s help, do as much as possible in advance to mitigate any delay which may frustrate your investors.
The clue is kind of in the title. These are aspects of the transaction which must be completed before the deal can close. Indeed, in anticipation of what will be expected by investors, you may be able to complete many of them even before there is an offer of money on the table and it may help attract it if you have done so. If this is your first investment, speak to your adviser about what the “CPs” might typically include.
For example, however, you could expect to see a requirement for key man insurance to be in place. You will also be expected to provide evidence that any intellectual property has been appropriately assigned (i.e. transferred) to the company or at least licensed. (If you are spinning out of a university, see my point above and deal with this as early as possible). You will also require service contracts for any directors to be in place. The earlier you can anticipate the CPs and “tick them off the list”, the smoother your investment will flow.
It takes two to tango.
If investing as a syndicate or via an entity, it may be impractical to have everyone concerned in the room at completion. Anticipate this, ensure the signing arrangements have been considered and, if required, Powers of Attorney are in place, sufficient, up to date and in the hands of your advisers as soon as possible. Powers of Attorney from shareholders and founders may also be useful.
Having a cheque in your hand (or more probably that of your adviser) will not seal the deal. The transaction will only complete when all investment funds are clear and available to you. Banks can take up to ten working days to clear a cheque through company accounts. (We know it only takes three through personal accounts! If you can explain it, we’d love to hear from you).
To avoid funds being unduly delayed, encourage your investors to transfer funds to their adviser’s client account by bank transfer and communicate the expected close date as early as possible. Many angel investors travel a great deal, particularly during the summer months. The earlier you communicate key information to them, the more likely they are to respond within your required timescales. Help them to help you.
Shares can only be issued in whole numbers. It is easy to structure a deal with rounded figures to the nearest £1,000 or £100 but before you ask investors to send their cash, make sure your adviser has confirmed the exact amount required. It may only be a few pounds of adjustment but it will make a big difference and the hassle of resolving any issues can be more costly.
Your investors will be as concerned with your human resources as they are with any other asset of the business. Ensure “every man is accounted for”. By this I mean ensure any secondments are properly documented, immigration requirements are met or anticipated. The devil is in the detail here and you will put yourself at a distinct advantage if you straddle this hurdle sooner rather than later. These terms of appointment can also flush out IP ownership issues.
The value of your business is as much about your client relationships as your IP. Investors will expect you to have sewn up all the loose ends. Ensure key client, customer and supplier relationships are all clearly documented and contracts are in place. You don’t want to have assured your investor of a key client relationship only to have to tell them it is governed by nothing more than a handshake. It may be an agreement but it is far from reassuring to an investor.
A huge amount of information will be exchanged between you, your investors and your advisers during the course of the transaction. Think about the most efficient and effective way to achieve that exchange and agree a methodology with investors. It will smooth your transaction and speed up the process. An effective method of information exchange in real time will also mitigate email traffic, which can become overwhelming during the most intense periods of a deal. If you have already established an online document room for the purpose of diligence (see our recent blog on diligence), you may wish to expand it into a deal room.
However, whatever the power of technology, the art of conversation is still valuable and much can be achieved to lower external hurdles by picking up the phone.
What's the one lesson you’ve taken away from a previous deal? Is there anything you would add to the tips we've set out above? Let us know below if we’ve missed anything that you think is crucial.