Affected by SVB collapse? Here are some funding solutions to consider

We were shocked to read the news about Silicon Valley Bank. Currently being reported is that the UK subsidiary will be put into insolvency from 12 March 2023, and SVB’s UK customers will be able to claim up to £85,000 from the FSCS, the UK’s deposit insurance scheme.

We know how vital your cash supply is – if most of your startup’s funds are in an SVB account, you might be worried you won’t have the money for this month’s payroll, to pay your suppliers and subscriptions. But all isn’t lost. A buyer might come forward to take over SVB, and the FSCS has long been a reliable back-up for customers when banks fail. The FSCS aims to compensate customers within seven days – but only up to £85K per person or individual business.

But a buyout and your FSCS claim are Plan B. In this post, we’ll look at some options to help you be ready with a strong Plan A to present to your team. We’ll also explain how our services can help, if you decide to raise more money to tide you over.

Defer, borrow or raise?

You have a few choices:

• defer paying bills, cut expenses, defer founder salary payments
• borrow money
• raise investment from new or existing investors

There are numerous articles on deferring payments and cutting costs so we’ll focus on getting more cash in.

In theory borrowing sounds attractive – if all goes well and you get back your SVB funds you can repay the loan, no need to give away any equity. But finding a lender may be difficult for the same reason you originally raised equity rather than debt funding – namely that unless you’re revenue-generating and (usually) profitable, banks won’t lend you funds, and neither will investors (that’s why they’re investors, not lenders).

Also, if you borrow money and can’t repay it by the due date you’re insolvent… so borrowing money is something to avoid unless you’re sure you can repay it when the time comes.

That leaves you raising equity investment at short notice, or using a convertible note, which can be the best of both worlds.

At SeedLegals we sort the legals for equity fundraising, so we’ll focus on that. Broadly there are three ways to go:

SeedFAST / ASA

A SeedFAST (the SeedLegals brand name for an ASA, the UK equivalent of a SAFE) works as follows:

• the investor sends funds now
• that investment converts into shares when you do your next funding round, at a valuation to be agreed in the round. You can also specify a valuation cap, so if the new round is at a higher valuation, the investment still converts at the cap.
• if you don’t do a funding round within a certain period (a maximum of 6 months if the investor is getting SEIS or EIS) the investment will convert into shares then, at a valuation you agree now, known as the Longstop Valuation.

SeedFASTs are a super-fast way to raise investment right now:

• no need to wait for a funding round
• raise from individual investors as you find them
• no need to agree a valuation, can do that when you do a funding round later
• SEIS/EIS compatible

You can do a SeedFAST on SeedLegals in minutes.

Note that anytime you enter into an agreement to issue shares you’ll need

• Board resolution
• Shareholder resolution
• Investor consent (if applicable)

These documents are all built into the SeedFAST workflow on SeedLegals, everything is e-signed on the platform, so you have everything you need in one place.

SeedFAST is available on SeedLegals for companies in UK, Ireland, Singapore and Hong Kong. For French companies you’ll want the local equivalent, BSA Air, also available on SeedLegals.

Instant Investment

If you previously had a funding round (which you probably did, it’s that money that’s in your SVB account) then perhaps the best way to raise investment – particularly if it’s existing investors topping up – is to add them as if they had invested in your last round. It’s like turning your last round into a rolling close, and topping it up now.

Advantages:

• super-fast and easy to do on SeedLegals using the Instant Investment feature
• you agree a price per share (i.e. valuation) now, investor gets their shares now
• investor gets their SEIS/EIS in this tax year (if the investment is made before 5^th April)

That last point – investor gets their SEIS/EIS in this tax year – may be the perfect opportunity for you to hit up your SEIS/EIS investors to both help your company and get their SEIS/EIS before the end of the tax year.

Like a SeedFAST, you’ll need board and shareholder resolutions, and additionally to offer preemption to existing shareholders (or a 75% majority to waive preemption) – those are all built into the workflow on SeedLegals so no need to wait for lawyers to sort that.

Instant Investment is available on SeedLegals for companies in UK and Ireland.

SeedNOTE / CLN

SeedNOTE is the SeedLegals brand name for a Convertible Loan Note (CLN) which actually might be the perfect tool to use in this situation.

A SeedNOTE works like this:

• the investor sends funds now
• if you do a funding round before the maturity date (which is typically 1-3 years) the investment plus any accrued interest converts into shares (like a SeedFAST or SAFE) at the valuation of the round, less any discount or cap that you offer the investor.
• if you don’t do a funding round by the maturity date, then (when setting up the SeedNOTE) you can specify that on that date the investment + interest either gets converted into equity or repaid.
• the investment earns interest over the period of the loan

Because convertible loans can be repaid and earn interest they don’t qualify for SEIS/EIS, which is why they haven’t been popular with UK startups (and why the UK government’s Future Fund wasn’t as popular as it could have been had it used an SEIS/EIS compatible instrument instead).

But in this case a convertible loan note might be the perfect solution – here’s why:

• Right now you have no idea if you’ll get your SVB money back or not
• So you need alternate funding, now
• But, what if you get your SVB money back… ideally you can just pay back the investor, and skip having to give away equity for investment that you may end up not needing
• On the other hand, if you don’t get your SVB money back, you don’t want to be in a position where you have a large repayable loan looming over your balance sheet that could bankrupt the company (or force you to raise more to repay it… which isn’t popular with future investors…).

On the flip side, because a convertible loan note isn’t SEIS/EIS compatible, it means it won’t be attractive to investors looking for SEIS or EIS. And – something few people know – once an investor has invested in your company without SEIS or EIS, they can never get EIS in future investments in your company… that’s something to be aware of, as offering non-SEIS/EIS shares to an investor means you’ve lost them as a future EIS investor.

SeedNOTE is available on SeedLegals for companies in UK, Ireland, Singapore and Hong Kong.

So, what to do?

Here’s our suggestion:

If you have new or existing investors looking for SEIS or EIS, use an Instant Investment to get the investment now and give them shares now, in this tax year.

If you can’t agree a valuation now, use a SeedFAST instead.

If you think there’s a good chance you’ll get your SVB money back, and your investors aren’t looking for SEIS/EIS, use a SeedNOTE, where you can choose that at maturity the loan either gets repaid, or converts into equity.

If you’re debating maturity date and interest rates with your investor for a SeedNOTE, we’d propose

• 3 year maturity
• 8% simple interest

which Future Fund somewhat standardised.

Talk to an expert

We can help you take investments quickly and efficiently. Our team has helped thousands of startups and small businesses find the right fundraising strategy – book a free call now with one of our experts.

Main image adapted from an image by Freepik.