The hope is then that with the support of its new administration, the UK can enhance further its position as the top destination for venture capital investment in Europe. This article looks at five key things for any company seeking venture capital funding to consider prior to entering into negotiations to ensure that they are "investor ready".
Intellectual Property
For technology companies in particular, intellectual property, and particularly the protection of that intellectual property, is essential. Protection of the intellectual property can be in the form of registration of a trademark or a patent or in something less tangible such as copyright. One of the most basic forms of protection, but one that is regularly missed by early stage companies, is for written contracts with developers and employees to state properly and comprehensively that any intellectual property developed by the developer or employee in the course of that engagement will be the property of the company and not that of the individual. Where the contracts fail to detail to whom the intellectual property belongs, there may be a presumption that it belongs to the individual and not the company – this is something that can be difficult to remedy and is not an easy one on which even the most seasoned investor can take a commercial view and move on.
Corporate Structure
For many investors, investing in a company with a clean share capital structure and history will be one of the "absolutes" on a venture capital transaction. Investors want to know the exact proportion of the pie that they are receiving. Unfortunately, with surprising regularity, when DWF are carrying out corporate legal due diligence on venture capital transactions, we uncover historic issues where errors have been made that mean that the share capital structure is not as the company, or the founders, anticipated it to be. The most common issues are as a result of flawed share buybacks but even more basic errors simply demonstrate a lethargy and lack of attention on the company's part as regards critical admin/housekeeping. Where problems are identified with a company's share capital, those issues are often challenging, time consuming and (potentially) expensive to remedy, all at a time when money is ready to be invested.
People
It's the most obvious point but having the right people in place is crucial in any business and all companies are seeking that perfect blend of technical understanding and business acumen. Investors are attracted to individuals they trust to enhance the value of their investment and use that investment wisely. Trust is key: never attempt to hold something back from an investor. What a company thinks might scare off an investor rarely does so. Most issues are surmountable. Early stage companies will ideally have key personnel to build or develop a product and those able to commercialise the product. Most investors do not have the time or the desire to run a company day-to-day. They want the management team to operate the company for them and, as a result, they are attracted to individuals they trust to enhance the value of their investment and use that investment wisely. Therefore, senior management in an early stage company may have to make tough decisions at an early stage on who the best people are to make the company a commercial success story.
Contracts
All contracts, from employment contracts to leases of office space and standard terms and conditions, should be formalised in writing. Again, it is a sign of professionalism and attention to the basics. Investors will have an expectation that all key contracts are in writing prior to handing over any funding. Where this is not the case, the associated risks can be enough for an investor to walk away or, at the very least, negotiate a reduction in the share price because of the unnecessary additional risk.
Tax
Where investment is predicated on an investor receiving certain tax reliefs (most commonly in venture capital transactions, EIS relief) the company should do everything in its power to have all necessary approvals and assurances in place with HMRC at as early a stage as possible. Companies can make sure they are ahead of the game by speaking to advisors at an early stage and putting the wheels in motion with HMRC. Failure to have the necessary approvals could result in a lengthy delay whilst applications make their way through the machinery of HMRC and may delay any potential transaction: and delays can be dangerous when there is an appetite and momentum to invest.
While there are significantly more issues of interest to an investor, a lot of which are bespoke to the business in question, we have used this article to highlight some of the simple ways that companies can "get their house in order" to ensure that they are ready and prepared to take on that venture capital investment that will propel them to the next level in their growth story.
