How to fundraise in an economic downturn
Are valuations down? Are investors dropping out? Here's what we're seeing at SeedLegals, and how to increase your invest...
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.
You have a few choices:
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:
A SeedFAST (the SeedLegals brand name for an ASA, the UK equivalent of a SAFE) works as follows:
SeedFASTs are a super-fast way to raise investment right now:
You can do a SeedFAST on SeedLegals in minutes.
Note that anytime you enter into an agreement to issue shares you’ll need
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.
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.
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 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:
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:
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.
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
which Future Fund somewhat standardised.