Starting a business is a tricky financial venture, but you don’t have to go it alone! There are options for funding your business to ensure you have the capital required to maintain and grow your business.
But what steps can you take to raise capital for your business?
1. Where can you get capital from?
2. What is a start-up term sheet?
3. What is an investor agreement?
4. What is the Enterprise Investment Scheme (EIS)?
1. Where can you get capital from?
When it comes to funding your business, you have several options. Funding can come in many forms, but the most common sources of funding are:
Family and friends- Family and friends can often seem to be the most immediate solution to financial needs when it comes to starting up a business. However, it is still important to establish clear terms and conditions of these loans to avoid future disagreements.
Angel Investors – Angel investors are outside investors who typically fall under the UK’s regulation of Experienced Investors. These are high-net-worth individuals who have been regulated to invest in private equity. Angel investors can be a valuable source of capital for a start-up business.
Bank Loans – Many banks offer business loan schemes with differing rates of interest and requirements for eligibility. This will vary depending on the bank.
Government Schemes – The government offers a range of schemes to either directly loan capital to new businesses, or to provide favourable incentives to encourage other investors.
Venture Capital - Venture capital firms manage large funds of other people’s money and are regulated to invest this on their behalf. Venture capital firms often have more capital to invest than angel investors.
Crowdfunding - Crowdfunding provides an avenue for individual investors who are not regulated as Experienced Investors. Crowdfunding schemes raise money from lots of people to invest in a project or a business.
Peer-to-peer funding (P2P) (e.g., Funding Circle, Ratesetter, Zopa etc) – Peer-to-peer funding allows people to fund small businesses through online P2P sites. This works similarly to a bank loan where the business will be required to pay the money back to the lender with a fixed interest rate over a pre-determined duration.
Small Business Grants – Small business grants are not required to be paid back but there are often strict criteria to be eligible for the grant. Typically grants are given to businesses that are seen to be furthering the community.
2. What is a start-up term sheet?
A start-up term sheet is a non-binding agreement between the business and an investor. It outlines the terms and conditions of the investor and business relationship. This is drawn up by the two parties to agree upon the specifications of an investment deal before any legally binding documents are written up.
While the start-up term sheet is not in itself legally binding, conditions within it such as exclusivity or confidentiality can be, therefore, it is important to consider this document carefully before progressing with the partnership.
3. What is an investor agreement?
An investor agreement is a legally binding document that outlines a contract for individuals wanting to purchase ownership in a company. This document will typically be drafted by a legal team and can be drawn up for an existing shareholder or an outside investor.
One common component of the investor agreement is the adherence clause. An alternative option is to attach a deed of adherence to the agreement as a schedule. The clause or deed would provide that any subsequent investors are bound by the existing terms of the investor agreement as if they were an original party to the agreement.
Another common component is investor tranches. This outlines ways in which the business can divide up potentially risky financial products into loans. Often investors will commit to capital investments at various company milestones.
Most of the terms in the investor agreement will be terms specific to your business which outline clearly the nature of the new shareholders’ rights over the company.
4. What is the Enterprise Investment Scheme (EIS)?
The Enterprise Investment Scheme (EIS) offers several incentives, such as tax relief, to investors who invest money into eligible companies. Being EIS eligible makes a business a more attractive venture to angel investors. Investors can invest directly into your company if you are an EIS qualifying company or into an EIS fund.
The following criteria must be met to be an EIS-eligible company:
Company must have a permanent establishment in the UK.
Cannot be listed on a stock exchange.
The company must have less than 250 full-time employees.
The company’s gross assets cannot exceed £15 million in value before any shares are issued.
Additionally, some trades are excluded from eligibility:
Dealing in futures or securities.
Legal or financial services.
Coal or steel production.
Production of fuel.
Energy generation
The HMRC can provide advance assurance to advise whether your business is likely to be eligible (although this is not required). Applications for EIS eligibility can be found on the government website: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme#how-to-apply.
How Can Pure Business Law Help?
If you are a business or an individual considering raising funds to invest in a business, please contact us and book a consultation with one of our expert Business and Commercial Law Solicitors. We are specialist Business and Commercial Law Solicitors based in Bedford and London and operating nationally.
Our highly experienced Business and Commercial solicitors can advise you on the different ways you can raise finance for your business.
If you would like to discuss anything raised in this article, please contact us, and speak with one of our solicitors. Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England and Wales.