Raising Equity Investment: A 7-Step Guide

September 30, 2022

Raising investment can be confusing, and daunting, but also an exciting process. But when it comes to raising equity investment, what can you expect? And what's the process? In this seven-step guide, we outline what you need to do when raising equity investment. Let's get started.

Step 1 – Get your house in order 

Preparation is key to ensuring you can obtain the funding that you need, so you need to ensure you are investment ready. An investor is going to want to know what they are investing in and will want to see both an executive summary and a detailed explanation about your business. So, if you haven’t already, now is the time to produce a business plan and other documents to show why your company is an investment opportunity that investors should not miss out on. You should also check you have the following in place:

Correct legal structure 

You will not be able to give away shares in a business unless you have the correct legal structure in place. As a result, you will need to ensure you set up a legal entity with shares. The most common legal entity is a private limited company. As a result, if you are operating as a sole trader, or haven’t started to trade yet and are seeking investment now or in the future, you will need to incorporate a company and transfer all the property owned by the business into the company. 

Business Plan 

This is a detailed analysis of your business, including research, data, financial forecasts, profit and loss for the last full year, historic accounts and any amount of investment required and what that investment will be used for. Your business plan should be clear and concise as it will be the investors’ first view of the company and first impressions are crucial. 

Presentation/Pitch Deck 

This should essentially highlight the most attractive aspects of your business. Sometimes you will send this out as reading material or you may be presenting it, so ensure it is tailored to the reader. 

Share Capitalisation Table 

This may need to be drafted with some assistance. This will set out the structure of the shares within the company before and after the investment is made. 

Create a list of target investors 

You should research the investors you would like to approach and ensure your documents meet their requirements.

Market the Company and Network 

It is often said that you can never know too many people. You should reach out to your connections who may be able to introduce you to potential investors or advise you on the process along the way and review the documentation. 

Step 2 – Consider SEIS and EIS 

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are tax reliefs for investors purchasing shares in qualifying companies and are designed to encourage investment in start-ups. There are different rules on qualifying for each scheme, so you should seek legal advice on whether your company qualifies and therefore becomes more attractive to investors. You can (or your solicitors on your behalf) can even apply for advance assurance to check that your company qualifies. 

Step 3 – Due diligence 

Once you have received an initial offer for investment, it's likely that the investors will ask a series of questions in relation to your business. This part of the process is called due diligence, where the investor conducts detailed research into the following:

  • Financial information – they will look at the current financial status of the company, any past performance of the company and a detailed look at any financial projections and any assumptions surrounding them. 
  • Technical matters– where a product or service includes a highly technical aspect, the investor may or may not appoint an independent assessment of the product or service. 
  • Commercial due diligence - look at the commercial issues that drive the business from a commercial viewpoint. This will include the production process (if any), the key suppliers and any distribution process. 
  • Legal review – this may or may not include a full legal review looking at the corporate history of the business, details of other investors, commercial relationships and contracts, insurance policies, employment agreements, service agreements, data protection and ownership of intellectual property. 

This will be the most time-consuming part of the financing process and therefore it is important that the process is managed correctly to ensure that there are no delays. 

Step 4 – Heads of terms 

The heads of terms set out the conditions on which your investors are going to give you funding, be that by taking equity in your company, a convertible note, or another arrangement. It will also set out any requirements you will have to meet to successfully gain funding. It will also include decisions about the dilution of shares and decision-making rights. Heads of terms are not usually legally binding (apart from a few clauses) and just outline the main terms before the legally binding agreements are drawn up and agreed by the party’s solicitors, outlined in step 5 below.

Heads of terms can be drawn up by either party’s solicitors, but either way, it is advisable that you get your solicitor to check them over to ensure that you are protected from any unreasonable or onerous terms. 

Step 5 – Drafting of the legal documentation 

Once heads of terms have been signed and the due diligence process is complete, either party’s solicitors can start to prepare the documentation which will implement the terms of the funding arrangement you have agreed. The following documentation will usually be involved:

Shareholders’ Agreement/Investment Agreement 

This document will outline the main terms agreed in the heads of terms in more detail. 

Bespoke Articles of Association 

The articles that will govern and regulate the operation of the company following the investment. 

Good Leaver/Bad Leaver provisions 

These clauses may be drafted into the documentation to protect the investors or major shareholders from key members of the founding team from leaving the company soon after the investment. 

Step 6 – Receive Funds 

Once any conditions of the investment have been met, the documents have been drafted and agreed, a completion date will be scheduled, so the documents can be executed along with the transfer of shares and the funds. 

Step 7 – Post completion matters 

After your fundraise there will be some post-completion matters that your solicitor will need to undertake, which include issuing share certificates, updating the company’s share register and filing any relevant documents with Companies House.

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