Startup funding: how it works and how to raise it
This ultra-detailed guide explains the types of funding and funding rounds and gives expert tips on how to raise funding...
This year seems to have whizzed by – with the end of the year fast approaching, we want to help you secure your funding well before Christmas so you can spend more time with your friends and family, and less time glued to your phone and laptop.
At SeedLegals, we close one in every six early-stage funding rounds in the UK – more than any other service. From the data we have from all these deals, we’ve observed three spikes of fundraising activity every year:
You could use the momentum at these three busy times to close your funding round – or you could take a more agile approach…
If you want to make the most of the momentum to close your fundraising round before Christmas, then it pays to have everything you need lined up – in particular, your S/EIS Advance Assurance and Term Sheet. There’s more on these below.
If some investors are ready to invest now and others are moving more slowly, you could use an agile fundraising method, such as our SeedFAST or SeedNOTE, or top up a previous funding round.
First, let’s take a look at two must-haves if you want to close a round before Christmas…
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A first step for many founders when fundraising is to apply for SEIS/EIS Advance Assurance. Many investors will only consider investing in a company that’s got this Assurance because it means they’ll get tax relief on their investment. Advance Assurance sets you apart from other companies as a very attractive investment opportunity. Here’s how it works:
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme allow investors to claim tax relief on the money they invest in your company. Investors can claim Income Tax relief at 50% for SEIS investments of up to £100,000 each tax year. And for the EIS, it’s 30% on investments of up to £1million.
Since the EIS was introduced by the Government in 2012, over 46,000 UK companies have received investment through EIS and SEIS worth over £25billion. In the 2019/2020 tax year, funding via these schemes totalled over £2billion (source: HMRC). These huge amounts prove that the schemes make investing in early-stage companies an attractive prospect for investors.
At SeedLegals, our expert team can review your S/EIS application in three days or less. We can help you get your Advance Assurance fast – our success rate is 98%. Here’s how:
When you start fundraising, you’ll need to prepare a Term Sheet: it’s a summary of the investment terms and a very handy tool to have ready when you’re approaching investors.
Here’s why it’s smart to prepare your Term Sheet before you meet investors:
On SeedLegals, you can create your Term Sheet in minutes. Select from options for each term (there’s guidance built in) and your document is generated automatically. You can then send it to potential investors via SeedLegals
It’s normal to do plenty of negotiation about the Term Sheet because it includes so many details such as the valuation, vesting schedules, reporting requirements and founder salaries.
💡 Tip: It’s worth putting effort in to get your first investor on board – we’ve noticed that when founders have got this first signature, it’s generally easier to get subsequent investors to sign (and therefore close the round faster).
But does preparing your Term Sheet really help you speed up closing your round? Our data says yes: on average, companies close their funding round 30 days after sending out their Term Sheet.
What if you’ve got your S/EIS Advance Assurance and a beautifully clear Term Sheet but some of your potential investors are moving at snail’s pace while others want to jump in right now? Is Christmas cancelled? Will you even close before the end of the tax year? Are you going to have to re-mortgage to tide over your company?? 😱
No – if you have investors ready now, this is where agile fundraising comes in handy. We want founders to have flexibility in their fundraising so we built ways for you to take one-off investments before or after a round. Next, we’ll look at how to do this…
You can issue a SeedFAST (our ‘advanced subscription agreement’) to new investors at any time. They allow investors to sign up to get shares in an upcoming funding round, in exchange for giving you money now – super handy to tide you over between funding rounds.
For a SeedFAST, you don’t set a valuation. Instead, your investors get their shares (usually at a discount) when you close your next funding round. SeedFASTs are carefully worded, easy to understand and – importantly – comply with SEIS and EIS rules. Because SeedFAST is so straightforward, it’s normal for investors to sign them within 24 to 48 hours of receiving the document. This means you get an instant injection of cash without weeks or months of negotiations. We explain more in this article:
MORE: SeedFAST – how ASAs work
If you have an investor who’s ready to invest before your round and wants interest or a return of capital, you can use our convertible loan note, SeedNOTE.
☝ Note: SeedNOTEs / convertible loan notes aren’t compatible with S/EIS investments.
Investors like convertible loan notes because if your company is insolvent or looking to liquidate or wind up, debt ranks higher than equity. And this type of agreement gives investors their money back if your company fails to raise a ‘qualifying funding round’.
If you have some investors ready to sign now but some who aren’t, with SeedLegals you can build into your funding round the ability to top up the round after it’s closed without having to get further consent from your existing investors.
With our Instant Investment, you add terms to your round to allow you to close your round when you reach an amount you’re happy with (or the amount you’ve been able to raise right now) and then top up later, within agreed limits.
The festive season can be stressful enough – with careful preparation for your round and agile fundraising, you can take in a significant amount of money now to take away the stress of closing with all your investors by Christmas. We ho-ho-hope you’re successful!
Did you close by Christmas? Or did you use agile fundraising? Let us know, we love to hear from you: firstname.lastname@example.org
To find out more about how SeedLegals can help with your fundraising legals, book a chat with one of our funding experts.
* Apologies for the awful puns, how terribly rude(olf) of us.