HM Insights

5 Common Investment Mistakes - HM Money Month

To kick off our HM Money Month, Gemma Sichi and I look at the 5 common mistakes that we often see a company make when they are looking or preparing for investment.  Obtaining equity funding can be a great way to expand your business and gain valuable expertise from industry experts, but it can be a stressful experience and can often identify issues that need remedied in your business. At Harper Macleod we want to ensure that you don’t fall into some of the traps that many companies often do and make sure that you are investor ready.

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  1. Poor foundations

In the same way that you want to present yourself in the best light, your company needs to present itself as best it can when looking for investment.  You are more likely to find investment if your company is on solid foundations.  If your company is in the early stages of its lifecycle a common mistake is to create a complicated structure too early on.  If this complicated structure isn't required then it may mean you will be spending unnecessary costs at the outset trying to simplify your structure for an investor.  Remember, less is more.  For example, keep your share classes to a minimum, as you grow you can introduce more share classes with different rights attached but don’t overcomplicate unnecessarily.

We would recommend considering the following questions before you start:

  • Does the company have the correct team in place to deliver the growth and profit potential?
  • Has the company incentivised the team so it isn’t exposed to staff turnover issues?
  • Has the company got secure contractual relationships with its suppliers and customers?
  • Has the company robustly protected its brand so it can execute its marketing plan?
  • Has the company sought advice and got good advisers in place to help prevent it making costly mistakes?
  1. Looking in the wrong place

We understand the excitement companies have when looking to find investors and grow the company.  A common mistake is for a company to waste crucial time speaking to the wrong type of investor without doing their research.  That is why we always advise companies to do their due diligence.

No matter what you are looking for, it stands to reason you are more likely to find the right thing if you are looking in the right place. So when it comes to looking for growth funding, don’t waste time speaking to investors who mainly provide early stage seed funding. Different investors invest in different things – so get to know the landscape and who likes what. Some of the initial things to think are about are sector, the amount of finance you require and the geographic location of your business.

  1. Jumping in too quickly

You have established you are looking to grow, you have got the company on good solid foundations and you have narrowed down the search so you can take a targeted approach to finding the right investment partner, so it is now time to get to know people.

Before an investor commits to the deal, it is common place for the investor and investee to have known each other for a reasonably long time – they have built a relationship. Given that post deal the company and investor are committed to each other, this relationship building phase is key. We have had many clients walk away from deals as, after getting to know the investor, they simply felt 'it wasn’t right'.

When in this phase the earlier work will show its worth. Also, before an investor commits to the deal, due diligence will be carried out and that really is when any skeletons in the closet will be discovered, so if you haven’t got your house in order you may struggle to secure an investor.

Consider how long will it take to find the right match? How many investors will you need to speak to before you get a yes from the right investor? Some of our clients report that they spoke to nearly 100 potential investors before they found the right fit. Even everyday tech brands such as Skype, Hotmail and Facebook spent a lot of time and energy finding the right investors.

Finding the right investor will take time, effort, resilience and a lot of pitching. However, if you have put the correct building blocks in place to get the company as 'investor ready' as possible the process will be easier.

  1. Articles of Association not being investment-ready

This is something that is often overlooked.  For many companies the articles of association can be an afterthought however an investor will look for certain things in the articles and so to ensure your company is as attractive as possible you should ensure that your company's articles are up-to-date.  For example, does your company have model articles of association in place?  This is fine if you are the sole shareholder and director of the company.  However, if there are more people involved then model articles aren’t the best form of governance.

It is through this document that potential investors can have a glimpse into how the company is run.  A company's articles of association are a public document and so a potential investor may check these prior to investment to understand the types of protections that are currently in place. 

  1. Using online templates

The internet is great for many things but a major downfall is the easy instant access to template terms and conditions.  As a company looking to save money where you can, the use of online terms and conditions may seem like an attractive option as it will be cheaper than paying legal fees. 

However there is a reason for this.  The use of online templates comes with a number of issues.  For example, in Scotland a document must be signed a certain way in order for it to be valid, however, it is likely that these online templates will come from the US or be drafted in a form that is more akin to English law.  You also need to consider the standards of drafting. 

Although the websites draw you in with a cheap price tag and promises of little hassle, if it sounds too good to be true, it probably is.  It is likely that the legal document template is error strewn in relation to incorrect legal terms and structure (which an untrained eye may not recognise) or it may be that the document you need has certain requirements in order for it to work as intended. 

Templated terms and conditions can also cause issue when it comes to diligence being carried out by an investor.  If you are using an online template with your customers and/or suppliers then this would be picked up on and may add additional cost and time to you investment in order for any potential issues that come with online templates to be straightened out.  Even worse, the use of these templates may deter an investor from investing in your company.

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