External fundraising will be a necessary step in the journey for the vast majority of tech companies. Besides the obvious economic necessity, external investment can be an exciting means of growing your business, giving you access to the experience and expertise of professional investors with a proven track record.
That said, the investment process can be a complex and daunting one, especially for those who haven’t been through it before. For companies who have not yet embarked on their first funding round or who are currently at the early stages of doing so, there are actions you can take to prepare for it.
A typical fundraising will have the following key steps:
1. Preparation of a business plan. What do you want to do with the technology, when do you want to do it by and how are you going to achieve that? This is a key document as it will go a long way to helping investors decide whether or not to invest.
2. Finding one or more agreed investment partners – unfortunately there is no magic formula for this, and there are various routes for doing so.
3. Negotiating heads of terms – a non-legally binding document setting out the key investment terms – principally how much investors are willing to invest and for how large a stake in your company.
4. Due diligence – essentially a series of questions and answers to enable investors to fully evaluate your company and identify any legal, financial or commercial risks.
5. Negotiation of legal documents – principally an investment agreement and articles of association. Together these will set out shareholders’ rights – more on which below.
6. Signing of the legal documents and injection of the investment funds.
Some tips to help you prepare for and manage this process:
• Get ahead of the curve on due diligence in advance, by ensuring that the IP which is key to your business is registered in the company’s name; that you have signed copies of key contracts; and that your books and records are in order, and that all this can be provided on demand in an organised manner.
• Manage your expectations as to what investors will ask of you – the following are all standard investment features:
• Reporting – post-investment, investors will insist upon regular reporting (management accounts, board meetings, financial projections and so on).
• Controls – investors will typically look to add a director to the board, and will insist upon having a veto over certain business decisions.
• Warranties – the investment agreement will contain a series of “warranties” (contractual statements of fact about your business). They will typically expect management to personally give these warranties alongside the company (meaning you could be personally liable if the warranties are untrue).
• Engage trusted advisers to advise you on the legal documents and guide you through the process. They can also help you identify and address any issues in advance of an investment (such as checking that you actually own your key IP) and provide a good sounding board for any concerns you might have – their experience can be invaluable.
Scotland’s tech sector is booming and we’re seeing a lot of success stories where investments are enabling companies to achieve their ambitions. It’s all about finding the right partners and taking opportunities. It’s an exciting time to be involved and a positive outlook for the industry.