Investor relations: create a plan for your startup
Our experts explain how to build and maintain positive relationships between your company, investors and other stakehold...
At SeedLegals, weâve just launched Instant Investment. Weâre getting rid of the stress, expense, and time-suck of traditional funding rounds. Startups can now take investment anytime, in just a few clicks.
Raising startup funding is a slow and expensive process. You have to decide the amount you want to raise and set a valuation. Then, you need to round up enough investors to reach your funding target. Then you negotiate the deal terms to come up with something that works for everyone. Then you need to create the legal docs for the round and get all the investors to sign.
The entire process is so complex, painful, and expensive that the startup world has evolved a 12â18 month funding cycle. That is, your goal is to raise enough money to last 12â18 months. Of that, you spend the first six months raising money (during which youâre focussed on finding investors and the legals rather than running and growing your business), then six months using the money, then, with only six monthsâ cash left in the bank, you frantically start the process over again, hoping that you have enough traction to raise another round before you run out of cash and the business hits a wall.
Itâs a brutal repetition of find investment, grow, find-investment-or-bust.
Imagine an alternate universe, one where those 12â18 month cycles are replaced with continuous investment. Instead of having to raise enough money to last a year or more and round up a group of investors to all get on the bus at the same time, you can top up on demand.
Youâre at a dinner telling people, as you do, about your amazing startup. One of the guests says, âHey I love the idea, can I invest ÂŁ10K?â âSorry,â you say, âIâm done on my last round, let me get back to you at my Series A next year.â Opportunity lost.
Now imagine that instead you say, âbrilliant, whatâs your email? Iâll send you a link to my deck and deal docs. If you like what you see just click to e-sign and wire the moneyâ. The investor will instantly get a share certificate to confirm their investment, and shortly afterwards the certificate to confirm their SEIS/EIS benefits.â
So, letâs look at why this isnât the way it works right now, and how we can change thatâŚ
From a VCâs point of view, those 12â18 month cycles are convenient. VCs play the numbers game, investing in dozens of startups. Some will scale, others will die. VCs are overwhelmed with investment requests, and the 12â18 month âgrow or dieâ cycle forces those requests into a form that allows them to categorise rounds, traction and valuation as Angel, Seed, Series A, etc.
You raise money based on promises you make (technical delivery, traction, revenue), and hitting those goals is key to raising another round.
VCs see the brutal 12â18 month cycle as a way of winnowing out the weakâââi.e. the failure of a company to round up the full complement of investors for their next round is a good indicator that the company isnât going to be the next unicorn, and so imposing this regime is a good indicator of success.
From the startupâs perspective, itâs the opposite. Letâs face it, there are over 20,000 growth startups launched each year in the UK, and perhaps a couple of unicorns a year. Statistically youâre not going to be a unicorn. But thatâs perfectly fine, you donât need to be a unicorn to have a valuable and profitable business that provides a great return to your investors. Why do you have to go through an insanely stressful cycle of funding rounds which, if you fail on any, sees your business crash and burn?
The good news is that this is already changing, see the rise of the Salami Round.
Doing all the paperwork for a funding round is, or at least was, a hugely time-intensive process. Redlined Word docs circulated back and forth between the lawyers for each party as each partyâs lawyer fiddles with the wording to insert clauses designed to protect their clientâs interests. Or simply to change the wording to reflect their personal or house style, no matter whether those changes are beneficial or just noise (âplease change Founders to a lower-case fâ). Those legal costs can easily run to ÂŁ10,000 or more on a ÂŁ500K round.
So itâs no wonder that historically it made sense to group investments into a few big rounds rather than lots of little rounds.
The good news is technology is rapidly changing that. The decades-old lawyer-to-lawyer exchange of redlined Word docs is being disrupted by legaltech startups like SeedLegals.
Now itâs time for the next step.
When you do a funding round, the company and the investors sign a Shareholders Agreement and adopt an Articles of Association which contain terms that prevent the company from issuing more shares without the consent of the investors. The reason is that the big fear that investors have (other than the company going out of business) is that the founders will create zero-cost shares, for themselves or friends, thereby diluting the investorâs stake in the company.
To prevent this happening, the funding round docs contain provisions that require shareholder consent to issue more shares, and also to give investors the right to buy any newly-issued shares to maintain their existing stake in the company.
These provisions prevent founders from taking an investment from a person they meet in the pub, as they donât have the power to issue shares for that new investment.
This problem wouldnât exist if this scenario had been thought about at the time of the last funding round, when the funding round deal documents could have been drafted in a way to allow this, whilst still providing all the necessary investor protections.
If you think about it as a game of chess, most times everyone is so keen to just complete a round that itâs equivalent to playing a game of chess looking just one move ahead. But each move contemplated not just what you want to achieve now, but also a few moves aheadâŚ?
Instant Investment changes everything. By building the ability to take additional investments into existing funding round deal documents, then using technology to automate the legals and company-investor communication for additional investment, you now have the ability to do a small initial funding round, raising only what you need or just the investment youâre able to get right now, and then top that up anytime, within limits agreed in the initial funding round.
Hereâs an example:
Letâs say that NewCo is looking for ÂŁ500K in investment, at a valuation of ÂŁ2M.
Normally that would mean they need to find investors for that full ÂŁ500K before they could close the round and get any money in. It could take months.
Now, as soon as they have, say, the first ÂŁ100K of investment lined up, the founders can choose to do a funding round of ÂŁ100K with âup to another ÂŁ400K of additional investment allowed anytime in the six months following the roundâ.
That allows the founders to quickly close the round, bank the first ÂŁ100K, and get on with growing the business.
Then, at their leisure, each time they find an investor, in just a few clicks they can send them a link to view the deal documents from the last round and a Deed of Adherence to sign to complete their investment. Itâs that easy.
Of course this has been possible in the past, but the combination of lawyers not having an interest to promote micro-transactions (if you want to think of them that way) that run counter to their manual approach to building documents, and the fact that without a legaltech platform to automatically generate all the documentation and allow for online signing, the transaction overhead was just too high to make this practical for widespread adoption. All this has now changed.
Welcome to a new era of âcontinuous fundingâ, augmenting and sitting alongside traditional funding rounds, giving founders and investors more flexibility to grow and scale their businesses, and to make investments on demand whenever they come across an interesting opportunity.
Get started with Instant Investment today or book a call with a member of the team to discuss further!