The weeks leading up to April 5 are always challenging for startups looking to close their SEIS/EIS rounds before the end of the tax year. This year, with the outbreak of coronavirus and its spread around the globe, things are way more fraught than usual. A couple of days ago I received an email from a founder (let’s call him John) laying out a scenario that’s being asked a lot at the moment.
- A few months ago I raised £35k through SeedFASTs.
- I had set those SeedFASTs to automatically convert in an upcoming round of £100K or more (including those SeedFASTs).
- I intended to do a £250K round (£150K in SEIS, £100K in EIS) to close at the end of March.
- All was going well, but just last week three investors got cold feet and pulled out of the round.
- I still have £55K pledged in the round, bringing the total to £90k including the SeedFASTs.
- So, I need to know what to do with those SeedFASTs – should they convert now, or later?
- And, should I do a £90K round now (of which £55K is new money), or keep looking for investors and aim to get to £200K+?
- Help! What should I do?
It turns out many companies are in the same position, and John is one of several incomings we had from founders who’ve seen investors pull out in the past few days and are looking for advice on what to do, so I thought I’d write this up for all.
For those who aren’t aware, a SeedFAST is SeedLegals’ hugely popular SEIS/EIS-compatible advanced subscription agreeement, used for raising ahead of a round. It’s the UK equivalent of a SAFE in the US.
So, John has a few challenges and dilemmas:
- Multiple investors have pulled out over the past week due to the decline in the financial markets. He wants to know if he should close the round ASAP at a lower amount and look for funds if required later in the year.
- If he does close the round at the lower price of £90k, rather than the planned £150k, he wants to know how this will impact the SeedFAST investors whose ASAs (Advanced Subscription Agreement) list £100k as the minimum size round in which the SeedFASTs will automatically convert.
- If the SeedFASTs don’t convert in this round then, if he doesn’t raise more before the 6-month longstop date, then the SeedFASTs will convert at the Low Valuation, which could be lower than the valuation that he raised at in this round. Not a disaster, but not ideal.
- Finally, John wants to know how he can close the round with the funds that are pledged now, and then top up later as he finds more investors, without needing to do another round all over again.
All excellent questions! While the exact numbers are specific to John, many other startups are in a similar scenario right now.
So what to do?
My advice is don’t hang about. Close fast. When things take a turn for the uncertain (and, as many adjectives as you can use to describe the last week or so, uncertain is definitely one), you’re better off taking some money now rather than holding for more money later. As they say, a bird in the hand is worth two in the bush. Much better to have some cash in the bank and restructuring your plans to match than rolling the dice and waiting for a larger round to hopefully come together. Being an entrepreneur is all about knowing when to take gambles. Now is not one of those times.
Secondly, take advantage of the April 5 SEIS/EIS tax year. There are plenty of angel investors who will be actively seeking out tax deductions for this or the last tax year (investors can backdate their SEIS/EIS claim to the previous tax year).
Focus on getting as many investors as you can on board right now, with a promise of SEIS/EIS in this tax year, and a goal of closing the round by, for instance, April 2. Doing that would give you a few bonus days to sort everything out before the April 5 cut-off date for issuing shares in this tax year.
After talking with John, we suggested the following plan:
- Get on a call with your SeedFAST investors, persuade them to convert their SeedFASTs in this round and get the certainty of shares now, and SEIS in this tax year.
- Change your round to raise whatever you can get in the next two weeks.
- Use SeedLegals’ rolling close provisions to allow you to top up another £150K anytime in the next 9 months, at the same or higher valuation. You can also read in more detail here on how to continue to raise tactically down the line in uncertain times.
Two rules for issuing shares
For those in a similar position, I’ll outline the step-by-step sequence for John to achieve his goals.
The sequencing is based on these two rules:
- SEIS/EIS applies to the date that shares are issued, not when money is received.
- Shares can only be issued after
a) the funding round deal documents have been signed by all the shareholders and investors, and
b) all funds have been received.
Here’s how to sequence it all
In order to hit his goals of quickly closing a smaller round, John needs to do the following:
- Contact SeedFAST investors to tell them about the round.
- Get their permission (in writing) to convert their SeedFASTs now, in this round, rather than at the qualifying round number mentioned in the SeedFAST.
- Add the agreeing SeedFAST investors to the round, marking their investments as Conversion (you’ll need our Seed Round package to do that; if you’re on a Bootstrap Round, we can switch you over to this.)
- If there are any investors who wanted to invest but didn’t want to do a SeedFAST, this is the time to get back to them and let them know you’re ready!
- Set a target close date of April 2 or earlier. Get as many investors on board as you can between now and then.
- In the Key Terms section in his SeedLegals funding round, enable Instant Investment to allow you to top up £150K any time between now and Dec 31.
- Get all investors to sign the Term Sheet.
- Get all investors and shareholders to sign the Shareholders Agreement.
- Get all investors to send money.
- Use the handy SeedLegals Funds Tracker module to track those investments as they come in.
- While you wait, complete and sign the Shareholders Resolution and Board Minutes.
- When all the money is in, contact us and we’ll review everything, close the round for you, and hit the button to issue the shares to your investors, and create the SH01 and other documents to send to Companies House.
- Over the coming months, as you find additional investors you can use Instant Investment to top up anytime, at the same or a valuation.
- And, when you’ve been trading for 4 months or spend 70% of the SEIS money, head back to SeedLegals to do your SEIS Compliance to give the investors their SEIS certificates so they can claim their tax relief.
At SeedLegals, we pride ourselves on giving you the tools to make startup funding faster, easier, better. While in many cases that means providing the technology platform to carry out a successful funding round, it also means being able to draw on our wide experiences gained building and growing startups to provide advice and answers.
By using SeedLegals for his earlier investments and his funding round now, in addition to the substantial cost savings of SeedLegals compared to a law firm, the huge advantage John has is the ease and speed at which he can adapt to changing conditions. In a matter of hours he completely restructured his round to close fast, top up later.
Have a question about closing your round? Contact us, we’re here to help!