How to raise investment in the USA: guide for UK startups
Want to attract US VCs? US legal expert Daniel Glazer of Wilson Sonsini explains what US investors look for, when to do...
One of the many challenges for a founder is finding investors. Some people are natural networkers, they know everyone and know how to work the crowd. But not everyone is like that, for most people reaching out to strangers and pitching is not something that comes naturally, plus you just don’t know suitable people to reach out to in the first place.
In the very early stages of your business you can shamelessly hit up family, friends and anyone you know, that usually works for raising the first £50K, maybe even the first £150K.
But, when it comes to raising £250K+ for the next round and beyond, you’ve probably exhausted that inner circle, you now need to set to work to finding people further afield. Some founders are comfortable doing this themselves, building what is effectively a marketing plan that will target social media, angel investment syndicates, funds, friends, friends of friends, customers, vendors, partners and, well, anyone you can find.
For many founders that’s well outside your comfort zone, so if only there was someone who specialised in finding investors… And, it turns out there are many people who specialise in exactly that, they mostly go by titles of Corporate Finance Advisor or similar.
Professional corporate finance advisors will, for a monthly retainer and/or a success fee based on investment raised, work with you on the business plan and pitch deck, help with investor prep so the company will sail through investor due diligence checks. And, they’ll reach out to their network to pitch your investment opportunity and seek investment.
It has to be said right now that many investors see it as a huge negative if a company has engaged the services of such corporate finance advisors – they see it as a failure of the founders to have what they see as a key skill set, namely the ability to fundraise themselves.
So be aware that if you engage an advisor to reach out to investors, many funds may not respond to those incomings on principle, they’re only interested in direct founder outreach. That doesn’t mean you shouldn’t use an advisor to help on your business plan and financial projections, or to provide you with a short-list of funds that match your business sector and stage for you to reach out to directly.
The people who do this professionally will hopefully have a well thought-through contract to send you that outlines the terms on which they will be paid, and specifies how to deal with situations like their introducing someone you already know (you obviously don’t want to pay them a commission on that), or what happens if an investor makes a follow-on investment a year later, will they be paid a commission on that too?
We’ll discuss these below, keep reading…
You’ll ideally want to find a way to get a warm introduction to an investor, it’s always better than cold-calling. So if you can find someone, perhaps a founder at another company that investor has invested in, to do an intro for you, so much the better.
Apart from hiring a corporate finance advisor who does this professionally, you may find yourself with an existing investor, or someone you know, who loves your business and would like to make investor introductions for you. Most times they’ll be delighted to do this without asking for anything because they want to help your business (and their investment!) to succeed, but in some cases they may ask for a commission on any investment that they find for you.
The advantage of amateur introducers, as I call them, is they’re seen by investors as genuine fans of your business, they come without the stigma of a corporate finance advisor sending pitch decks on your behalf.
But, over the years I’ve seen numerous instances of friends break up and relationships go sour over introducer disputes – it’s so easy to end up with a disagreement over whether a commission is due, and that can kill years of friendship, or make for an unhappy shareholder who will no longer be singing the praises of your business.
Whenever you agree a commission with an introducer, it’s vital that you carefully think through all the eventualities, and agree terms that cover all of them. That way, each person knows the rules of the game up front, and no matter how things work out with those introductions, it won’t affect your relationship.
You may be wondering at this point whether your introducer needs any special permissions, like FCA approval, in order to make introductions to potential investors.
Our focus here is on introducers who introduce investors to an unauthorised company which is going through a funding round. A different set of rules applies to an introducer who introduces an investor to an authorised person (i.e. FCA authorised, carrying on a regulated activity).
The FCA’s view is that the activity¹ of making ‘introductions’ is sometimes caught as a regulated activity. Whether an introducer needs to be regulated will typically depend on whether they are found to be:
The answer will turn on the scope of the activities being carried out by the introducer, and the purpose and intent behind those arrangements. FCA guidance states that it is unlikely to catch the following activities:
FCA authorisation is only required where a regulated activity is carried on “by way of business”.8 A casual, one-off, introduction by a friend where no fees or commission is paid is unlikely to be “by way of business”, and so not a regulated activity. However, where there is any business element to the introduction (such as being on more than one occasion, or where payment is made), the risk is that the activity is being carried on by way of business. The question is then whether the activity goes beyond a passive introduction, or whether the introducer is involved in “arranging” or “making arrangements with a view to” deals in investments.
Carrying on a regulated activity when not authorised to do so is a criminal offence, and can result in the investment transactions being unenforceable, or the investor having the right to have their money refunded.
The takeaway is that while this is a grey area, it’s an important question to get right, otherwise you or your introducer may be exposed to regulatory actions. If you are still unsure you should take legal advice on how the rules and guidance apply to your circumstances.
In summary, and as an example, if your advisor:
then this is the sort of thing your friend might do, and they don’t need to be regulated.
The first thing to specify is exactly which services the introducer will be providing, which can include one or more of:
For amateur introducers it’s generally going to be point 5, with some feedback on points 1 and 3.
Professional advisers may offer a lot more as part of their service – choose which you’d like, as you’ll likely be paying for those, either as a retainer or as a higher commission.
Professional advisors know that funding rounds often take way longer than founders expect, or may never end up happening at all, so they want to cover their costs and get paid up front, regardless of the outcome. So professional advisors may ask a monthly retainer, usually in the range £5000 to £10,000 per month. Since you’ll have to pay the retainer before you raise investment, make sure the business has the funds available, assume you’ll need to be paying at least 4 months.
Of course also be aware that the retainer gets paid regardless of whether the person is successful at finding investors or not – that’s the point, you’re paying them while they’ll looking, or supposed to be looking – so do your own due diligence on anyone who asks for a retainer, ask for references of other clients you can call, etc.
Most commissions are in the 5% to 7% range, be wary of any advisor who asks for substantially more than that. If an amateur advisor, aim for 5% or less.
Some advisors want their commission paid as cash – i.e. if they bring you £100K in investment, you’ll pay them £5000 on receipt of those funds from investors they’ve introduced.
Cash keeps things nice and simple, but of course the reason you’re raising investment is because your business needs cash, so some advisors are happy with equity instead, i.e. if they bring £100K in investment, they’ll get £5000 worth of shares or share options. An advisor taking equity instead of cash is a vote of confidence in your business.
If you agree that the success fee will be paid as equity, then you have a choice of giving the advisor shares (just as any investor will get) in the funding round, except that their shares would be issued at nominal value (i.e. a penny or so per share).
For an advisor, receiving free shares creates a potential tax liability for them – that’s fine for professional investors because it’ll likely be their company receiving the shares, and they’ve factored that into their business planning. But for an amateur investor who is new to this, giving them £10K’s worth of free shares may create an unwelcome surprise for them when their account does their next tax return.
So the alternative is to give the advisor share options instead of shares, from the option pool that’s usually created as part of the funding round.
Let’s say an advisor brings £100K of investment, and gets a 5% commission on that, so that’s £5K of shares or share options. If the company valuation is, say, £1M, then that equates to 0.5% equity, that’s small enough to be comfortably allocated from the typically 10% employee share option pool.
If you scale things up – the advisor brings £1M of investment on a £10M company valuation – the same percentages apply.
In most cases the promise you make in your advisor contract to issue the shares or share options on successful completion will be sufficient. But, some professional advisors will want a Warrant for the grant of the shares or options – basically a separate document that outlines in more detail the terms under which they can get those shares or share options. You can create such a warrant on SeedLegals, it’s free as part of our subscription plans, you’ll find it in Agreements -> Investor Agreements.
If your advisor also happens to be investing themselves in your next round, or invested in a previous round, and their investment is SEIS/EIS, then you need to take care that paying them a retainer and/or a success fee doesn’t disqualify their SEIS/EIS.
Most importantly, there should be no connection between their investing themselves and their earning a retainer or commission – any such coupling of those may deem them to not be taking “the ordinary risks of an investor” if they’re getting a payment as part of their investment. And, in this case it may be especially beneficial to give them share options instead of shares for their success fee (if they’re being paid in equity) as that avoids any SEIS/EIS issues of their getting paid shares and free shares in the same round, which will invite scrutiny.
Any introducer agreement should carefully define the scenarios under which a success fee is due, or not due. Imagine the following scenarios:
In your mind they would be due a success on scenario 1 only. But in the mind of your introducer, if you turn down an investor, or your round doesn’t go ahead, or you don’t pass the investor’s due diligence checks then, well, that’s not the fault of your introducer, they’re done their work, they should be paid.
So it’s really important that a fee only be paid on a successful investment, which is defined as the funds being irrevocably received from the investor and their being allocated shares. Anything else doesn’t count for a payable success fee.
There are also some edge cases to consider where e.g. someone they introduce wants better terms than other investors, or to be paid an annual amount as a director, or offers services in kind instead of cash… so you may need to agree special terms in some cases.
It’s rare, but sometimes things go wrong after a round is closed – maybe the investor makes a claim against the company under the Warranties and wants some or all of their money back. In that case you presumably want to be able to get back any success fees you paid to the introducer for that investors, so a refund provision for 6 months post-investment is something to try to agree on.
This is the period during which the introducer will be earning a monthly retainer and/or during which you want them to send you introduction. Obviously if you’re paying by the month then you’ll want to be clear when that period ends – ideally you’ll want a rolling 30-day termination, but the investor may want a 3-month fixed term, or a 3-month notice period.
If the investor will only be paid a success fee then you may be happy with a more open-ended introduction period, maybe it’s just fine that 2 years from now they drop you a note saying they’ve found a potential investor. But, even if you’re happy for ongoing introductions, you may be best off defining a short, sharp, period for your engagement with them, not just to focus their minds on achieving a result (if they don’t find investors in this period they won’t be paid anything), but also you want to avoid the situation where a year from now they’re still going around telling people that they’re acting on your behalf, shopping around an ancient slide deck, and causing embarrassment with the Series A funds you’re now engaged with.
The introduction period specifies the period during which the advisor can bring you new leads. But, they’ll want to earn a commission any investment that stems from that introduction, even if the investment happens months later. A professional advisor may insist on a commission period of 2 years, i.e. they will be paid a commission on any investments made by someone they introduce for two years starting on the date of the introduction. Ideally you’d want to try to agree a shorter period, 6 months if you can get away with it, otherwise 12 months.
You might also try to agree that only the first investment made by an investor earns a commission for the introducer, any subsequent investments don’t. That’s unlikely to fly with the advisor, they know that investors will often make follow-on investments in later rounds, they’d like to be paid on those. Realistically, since an increasing number of funding rounds are rolling-close rounds – i.e. the company raises on a continuous basis – agreeing a fixed term of, say, 1 year from introduction, with a commission paid on any investments made by an introduced investor over that time, may be the simplest and clearest way to go.
Covered above, but worth restating that it’s really important to define what happens with follow-up investments – e.g. 6 months after your round closes, you do a top-up round, or your earlier investors have a right of preemption in a new round and invest some more… will your introducer get a commission on that? It’s important to define that up front or risk ugly disputes later.
Professional advisors may ask for exclusivity – i.e. during the Introduction Period (and sometimes even during the Commission Period) – they want to prevent you engaging any other advisor. Just like giving a real estate agent exclusivity on your house sale, on the one hand it will hopefully incentivise them, they’ll know that they won’t go to lots of effort only for you to tell them, sorry, we’re sorted already. But on the other hand, if they fail to perform you may find yourself completely stuck, unable to use someone else to find investors… with your business running out of money in the meantime.
So avoid giving exclusivity, certainly never to amateur introducers, and ideally not to professional introducers either.
If your advisor is on a monthly retainer and not performing you’ll want to be able to terminate them – the last thing you want is their having an exclusivity provision and a fixed term agreement, leaving you having to pay them and unable to use someone else to find investors for you. So an unconditional 30-day termination period and/or at least as set of KPIs that need to be met each month for the arrangement to continue, are desirable.
With amateur advisors, their expectation is that if they find an investor for you, fab, they’ll get paid a commission on that, but in no way are they prevention you finding investors on your own, or expecting to be paid a commission on any investors that you find yourself.
But with professional advisors it’s often the opposite – to avoid conflicts where they do all the legwork and create demand and then in parallel you’re leveraging that and finding investors yourself, in many cases a professional introducer will expect to earn a commission on every investor your get, including ones you find yourself.
Now, of course you’ll point out that you already know and are talking to lots of investors, surely they shouldn’t be paid a commission on those? To which the usual reply is “Send us a whitelist”.
So, a whitelist is a list of investors who you already know, or who are already dealing with. You’ll send that list of investors to your introducer, and any investments by those whitelisted investors is all yours, they won’t be paid a commission on those. But, anyone not on the whitelist is theirs, so if you are agreeing a whitelist arrangement, you’ll want to ensure everyone you plan to approach yourself is listed.
It’s rarer, and usually not something that you’ll need to include in the contract with your advisor, but in some cases there will be people you actively don’t want them approaching. For example, you may not want your existing shareholders to know that you’re working on a new round until you have new investors lined up, in that case you’ll want to make sure your introducer is not approaching them.
Your advisor leaves you a voice message “Hey mate, just letting you know I redid your slide deck, much shorter, punchier, added some competitors, tweaked the financials, mentioned you qualify for SEIS… you do, right?”. If that leaves you sweating, you should have had sign-off rights in your introducer contract. Basically, letting someone go out and make presentations on behalf of your business is always a risk, the last thing you want is they’re hawking around town something they’ve patched together themselves, which you haven’t even seen.
So, you’ll want provisions in your introducer agreement that doesn’t allow the introducer to share any materials that have not been signed off by you.
You thought your advisor was going to call a few friends and make some discreet private introductions… imagine your surprise when you next open LinkedIn to be greeted by a post saying Bob is delighted to be the exclusive organiser of your company’s next funding round, and to please contact him if you’re interested. Of course this might be something you really want… but either way your contract should define the types of channels they can use to find investors – in particular whether private intros only, or can they post publicly on investor Slack channels, WhatsApp groups, Twitter, etc.
If you’re just letting an amateur advisor make some calls and intro investors to you then confidentiality isn’t a big issue, you’re not telling them much that’s not in your pitch deck already. But in the case of a professional investor, particular one who’s helping you craft your business plan, you may have supplied them with a lot of sensitive information – they may know your crazy previous financial projections before they reshaped them – you definitely want to make sure they’re bound by non-disclosure provisions.
So, quite a lot to think about when engaging an advisor!
We plan to create a dedicated Introducer Agreement on SeedLegals which will let you create such an agreement quickly and efficiently. We’re not quite there yet, in the interim you can use our Consultancy or Advisor Agreements, and use the freeform Additional Items sections to specify any of the items above that are not covered elsewhere in the agreement. If you need more, hit the chat button, we’re here to help!
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Article 25 Regulated Activities Order (The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001).
Article 25(2) Regulated Activities Order.
Article 53 Regulated Activities Order.
Section 22 Financial Services and Markets Act 2000.