Money matters for start-ups
Statistics suggest that an average UK start-up requires around £23,000 in the first year to get the business up and running (all depending on what your business is of course!)
The majority will need additional funding in order to start trading and there are various ways in which start-ups can access capital that is required – so do your maths and work out what you think you'll need before working out how you will get it. One of our earlier blogs covered business planning so it's wise to have that at hand too.
Unless you have the money saved, you will need to look at who can help you. You probably well know, more traditional finance providers, such as banks or private equity firms, are less likely to lend at such an early stage and even angel investors may decline to be first if you have no commitment from family and friends.
So talking to your friends and family about your business is the most common starting point for initial funding, with angel investors offering an alternative for early stage investment, potentially with the ability to invest larger sums, and then ICO's if you are entering your scale-up phase.
Your options and what to watch for?
Friends and family first: friends and family rounds of fundraising are an obvious place to start for any new business, but such an arrangement could end badly if not handled and documented appropriately. Bringing friends and family on board early on in a company's life can be a great way for business starters to share their potential future success with those closest to them, but there is also the possibility that if things don't go quite as planned, the company could become a source of tension – not ideal when you're trying to focus on growing the business! Be sure to draft the correct legal documents – we know it can be a sticky point to raise!
Crowdfunding: this is quickly becoming one of the most widely used ways to fund a start-up as it is a quick and easy way to advertise your new business to a large number of people. Crowdfunding involves using the internet to spread the word about your start-up to potential investors and asking for a small contribution from them. Please do seek advice as there could be many complications that can occur if you have not spoken to an expert before embarking on this route.
Angel investors: other than providing an arm's length alternative to investment from friends and family, the other key advantage to using funds from an angel investor is that a new company receiving funding from an angel is likely to be able to benefit from the angel's experience and contacts. However, accepting angel investment means relinquishing a certain degree of control – an angel is likely to expect a seat on your board, so they can offer strategic advice and input on important company decisions. Please make sure you carefully document the relationship between friends and family, or the angel, the original owners and the company in the company's articles and by way of a shareholder's agreement, in order to clearly set out each party's rights and responsibilities.
How to find angel investors
There are many ways to find investors. To find an angel investor, you can carry out a free search of those high net worth individuals and investment funds potentially willing to invest in start-up companies on the UK Business Angels Association website (https://www.ukbaa.org.uk/). You can even narrow the search criteria down by sector, region and investment value sought, meaning there is a greater chance you will be able to find a potential investor for your business proposal.
An important benefit for those investing in early-stage start-up businesses is that many investors will be eligible to benefit under the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS). These government designed initiatives have been created so that companies can raise money to help grow their business by offering tax reliefs to individual investors who buy new shares in the company. There are various rules that businesses must follow so that investors can claim and keep tax reliefs relating to their shares, but broadly, the schemes will be financially beneficial to those investing in start-up businesses.
How to structure your investment agreement
Once you've found the right funders, it is important to structure the investment appropriately in order to ensure that the parties get what they want from the arrangement. Questions to consider include:
- Is the funding going to be a loan, or will the investor receive shares in exchange for their cash?
- If they are getting shares (as is fairly common in start-up companies) what rights will those shares have?
- What happens if an investor wants to get their money back, or the company does well and more investment is required to fuel further growth?
All that said, it can be hard to predict the future, but with the right provisions in place, the risk of potential problems developing can be greatly reduced.
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.