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...
The UK government is finalising Future Fund, a £250M package designed to help UK startups.
We think the current scheme has a major design flaw, it’s not compatible with SEIS/EIS, and so it won’t be useful for most early-stage startups.
But, problems with the fund aside, we put together the definitive guide. We’ll help you check if your company qualifies, and if it does, what you should do right now to get to the front of the queue so that when the doors open you’re in first, before the money runs out.
We’ll also describe how the scheme works… at least our best guess at how it will, since nobody seems to know for sure, and it’s still changing.
To qualify for Future Fund investment:
There have been reports that previous funding must have been from VCs, but we see no evidence for that, our reading of the scheme is that any investment (crowdfunding, angel investments, VCs) all counts.
Future Fund will then match that, i.e. to give you double that amount in total.
Importantly, because Future Fund is not currently SEIS/EIS compatible (we’re lobbying to change that!), you’ll need to find VC investors (they mostly don’t get SEIS/EIS) or persuade angel investors to forego SEIS/EIS for this round and (because of the way SEIS/EIS works) for all future investment that they make in your company.
Whatever you do, don’t hold off any plans that are currently in place to raise investment or change direction on your current funding efforts until you’re sure that your company can benefit from the fund. If so, keep reading…
There’ve been lots of articles on the fund’s promises, but almost nothing on the mechanics of how it will work, so here’s our breakdown of the mechanics.
Note that the Future Fund details are still being worked out, and we haven’t come across anyone who knows how it will actually work, so this is our best guess, we’ll keep updating it as we learn more.
The important thing to note is that the government and all your new investors will sign the same, single convertible note document. That’s going to make the logistics quite difficult, and raises a bunch of issues:
We think it would be better if each investor could simply sign their own convertible note or SEIS/EIS compatible SeedFAST on whatever deal terms you agreed with them, and then the government would sign their matching investment convertible note with their own deal terms. But, so far as we can tell, that’s not the way it’s being designed, the reason, quite reasonably, is that the government doesn’t have the time to read a dozen different convertible notes in any given round to check the minutiae of each investments, so they’re mandating that all investors sign their, single, document.
Okay, so now you know how the process will work (or at least our best guess as to how it will work) the most important thing you can do, starting right now, is go find investors!
Future Fund starts out at a paltry £250M, that’s enough to fund just 500 companies in all of the UK if their average investment size is £500K. Word is that the government will top up the fund based on demand, but there’s no guarantee of that, or when that might happen.
So, you want to be first in the queue. And to do that you don’t want to start approaching investors when the fund opens, you want to do that right now, so the moment the doors open you’re right there, submitting your application before anyone else does.
When you take money from investors you’re meant to do a Know Your Customer / Anti-Money Laundering check. At simplest it’s just getting your investor to send you a copy of the photo page of their passport, and keeping that on file. Few companies bother with this, but since it would be embarrassing for the government to be seen match-funding a drug cartel investment it’s likely they’re going to want to see those KYC / AML check results. At SeedLegals we’re working on a streamlined process for doing that, based on the actual requirements as they become clear, stay tuned for more on that.
The government is likely going to want to verify that you’ve met the qualifying condition of having raised at least £250K previously. We don’t know how they’ll do that, but one obvious method they may use is to check your Companies House filings, where there should be an SH01 filed for each share issue. So all they need to do is multiply the number of shares on each SH01 by the stated price per share to know how much you’ve raised. This information is all public, and since each of the Companies House filings are time stamped, and nobody thought to game the system until now, it’s a pretty good way of checking.
This means that if you’re behind on your Companies House filings, you need to fix that right now – you wouldn’t want the failure to post the SH01 timeously for your last round to mean you don’t qualify for Future Fund, or, more likely, incur several weeks of delay while you fix it.
Before you can enter into an arrangement to issue more shares in the future you need shareholder approval (since those shareholders will be diluted by the new offering), a board meeting to approve the transaction and, if you have Investor Consent provisions in your last funding round (which would be the case for most applying companies, since they would have had to have had prior funding rounds) you’ll need the consent of, typically, 50% of the investors by number of shares held.
None of this is rocket science, but it can take weeks to do the paperwork and get all the signatures in, so if you can get that done before the Future Fund doors open then you’re all set to go while other companies are futzing around waiting for their shareholder and investor approvals.
If you qualify for Future Fund:
Great, we’re here to help you get there ahead of everyone who’s not using SeedLegals.
If you don’t qualify for Future fund, don’t despair:
Try to figure out as quickly as possible whether this fund will work for you or not. If not, most importantly don’t wait, get cracking on finding SEIS/EIS investors! All the companies applying for Future Fund will be waiting on non-SEIS/EIS funds and VCs to take their call, you can use the opportunity to reach out to all the angel investors you know.
And angel investment is not in bad health right now, at least compared to VC investment, see our SeedLegals deal data.
So, take advantage of everyone else being distracted by Future Fund, go find some angel investors, and use SeedLegals agile fundraising to get SEIS/EIS funding directly, on much better terms than the actually pretty bad terms (for companies, not investors!) that the government are offering.
And, regardless of whether Future Fund can help you or not, if cash is tight here’s how to cut costs and extend your runway while you’re looking for funding.