We look at five of the key things you need to think about when considering bringing in investment to your business.
1. What is equity investment?
Equity investment involves investors investing money in a company in return for shares. Most investors are looking for a return on their investment by way of capital gain. A capital gain is achieved by investors selling their shares at an exit event, namely the company being sold. Investors tend to seek an exit within the shortest timescale possible. A loan is different. A loan is typically repayable, however equity investment is not.
2. Where can I find equity investment?
In Scotland, the most active investors are typically business angels or syndicates. Business angels tend to be private individuals who invest with the expectation of making a good financial return. They are generally seasoned entrepreneurs or professionals and can bring a lot of wisdom as well as money. Angels are commonly organised into syndicates (groups) which increases the financial leverage of each individual angel. Venture capitalists tend to target the higher end of the investment portfolio and as such look for significantly higher returns. Many venture capitalists have a high minimum investment amount so can be unsuitable for many Scottish start ups. The public sector in Scotland is also extremely active with Scottish Enterprise and Highlands and Islands Enterprise managing many schemes. The equity finance schemes includes the Scottish Seed Fund, the Scottish Co-Investment Find and the Scottish Venture Fund.
3. Are you ready for investment?
A well written business plan is one of key documents when raising equity investment from a business angel. One of the ways that investors reduce any risk of losing their investment is to carry out due diligence – an information gathering exercise. Investors may carry out extensive diligence on every area of your business, from intellectual property to finances to contractual arrangements. It is important that you are organised and able to answer any questions an investor may ask and provide them with any supporting documentation that may be required. Assuming you keep your house in order, this should not be too difficult. In order to make the investment more attractive to potential investors the company may wish to seek tax advice about the seed enterprise investment scheme (“SEIS”) and the enterprise investment scheme (“EIS”). SEIS and EIS can be tax efficient ways for individuals to invest in a company and are particularly common with business angels and syndicates.
4. How much investment should I raise?
The business plan along with your financial projections should assist when considering how much money to raise. The valuation will be critical to determining the price per share and therefore the size of the investors shareholding. Valuing a company is no exact science but advice and guidance can be sought from your accountant or corporate finance adviser in respect of this. Remember to incorporate deal costs into your financial projections!
5. What terms might investors expect?
As a general rule, investors may want to appoint a director and have an agreed list of matters which would require their consent. Investors will also typically expect founders to enter into formal service agreements containing restrictive convenants. It is also worth noting that fees shall be involved. An angel syndicate may look for a deal fee, an on-going monitoring fee, in addition to their legal fees being paid by the company.