How to raise from US investors: Guide for UK startups

At SeedLegals, founders regularly ask us about raising money from US investors – whether to raise in America, what US investors look for, whether to ‘do the Delaware flip’, and more.

To answer all these questions, and to highlight some of the pitfalls for UK businesses when looking for investment in the USA, we ran a webinar with Daniel Glazer of Wilson Sonsini, the international American law firm that specialises in advising high-growth technology companies from corporate formation to IPO/M&A exit and beyond.

In this post, we’ve summarised the essential information for founders considering fundraising with VCs in the United States. You can view the full-length webinar video below.

Contents

• Be realistic about your chances of gaining US investment
• Prove you’re a safe bet
• Understand what drives US VCs
• Decide if VC cash is right for your business
• Be honest about what you’re building
• US acquirer? Be ready for heavy-duty due diligence
• One-off investment? You can use a SAFE-style SeedFAST
• Do the ‘Delaware flip’ only if it’s the deal-breaker
• Watch video
• About Wilson Sonsini
• Sign up for our events newsletter

Watch video

Anthony Rose, CEO of SeedLegals talks to Daniel Glazer of Wilson Sonsini.

The full video is one hour: the first half covers how to expand and hire people in the US, which we’ve set out in our blog post: Expand in the USA: guide for UK startups. The second half is about raising money from US investors, as set out above in this post.

Be realistic about your chances of gaining US investment

The chances of a UK company securing US investment increase as your company matures:

• Seed
  In the UK, Seed funding usually comes from UK or European investors.
• Series A
  Again, funding for the vast majority of UK Series A companies is usually from UK or European investors, with relatively few rounds led by a US investor before the UK company has established a substantial US presence (less than 3%).
• Series B and later
  For Series B and later-stage companies, investment rounds can be global – it doesn’t matter so much where you’re located because you’ll have the metrics to prove you’re a sound investment, and you’ll be able to attract investors located anywhere in the world.

Be realistic – as a founder of a growing startup, you’ll need to allocate your time according to your chances of success. If your business isn’t yet successfully past seed stage, attracting US investors will be a challenge.

Prove you’re a safe bet

What do US investors look for when they invest in early-stage UK companies? As well as a pitch deck explaining how you’ll generate a big return for your investors, you’ll generally need to hit at least one of these criteria (ideally, all of them):

• Management in the US
  You have one or more senior leaders based in America, focused on building your company.
• Significant customer traction in the US
  Metrics that prove people in the US are buying or want to buy your products or services.
• Your team have raised with US investors before
  Investors bet on your people as much as on your product, so if some of your senior team have successfully raised with US investors before, this reassures potential investors.
• You’re building a much better product
  It’s more straightforward for US investors to invest in early-stage US companies, so whatever you’re making, it needs to be substantially better than anything investors could invest in Stateside.

If you don’t hit at least one of the criteria above, attempting to attract American Seed or Series A VC investors might be a waste of time.

Understand what drives US VCs

Like any VC, US VCs are looking to maximise their return. But the individual decision-makers at US VC firms differ significantly from their UK counterparts: most US VCs are ex-startup founders or have worked at startups.

According to 2019 research by Diversity VC, only 8% of UK venture capitalists have first-hand experience inside a startup. But in the USA, this figure is 60%

What does this mean for you? American VCs aim to de-risk their investment by applying their experience to help their portfolio companies. They know how to grow a business in the US – but not in the UK. If you’re a UK company, you’re automatically outside their area of expertise – so you’ll need to convince a US VC that you’re a better bet for investment than any home-grown American company.

Decide if VC cash is right for your business

Whether you’re raising in the UK or overseas, before you approach potential investors, you’ll need to consider which type of investor is the right fit for the type of business you’re building.

For all VCs, your pitch will need to show a credible pathway to their return – but each type of VC is looking for a different outcome. In the UK, VC funds usually fall into one of four categories (with most VCs located in London):

• SEIS/EIS funds
  These funds are looking for a strong return but they’re also interested in the tax benefits of SEIS and EIS investments.
• Private equity
  These VCs invest for their private clients and are more conservative, often with a focus on managing risk.
• US funds
  US VCs often invest more money and at higher stakes than UK VCs traditionally do. Many US VCs bet big, hoping for maximised returns.
• US-style funds
  These are UK VCs which take a US-style approach to investing.

If you can offer what a VC wants, then VC cash might be right for you.

Be honest about what you’re building

US VCs (and US-style VCs) are typically seeking the highest possible return. They know that many companies don’t return the fund – but to invest, US VCs must be certain your company has a credible pathway to return the fund and the possibility of a big return. How big? Many US VCs look for a $3B+ exit.

US acquirer? Be ready for heavy-duty due diligence

Got a US company interested in buying your startup? Congratulations! The financial upside of this can be higher than with a UK acquirer. But US investors will make you work harder to prove your company is worth what they’re paying.

Be ready for heavy-duty due diligence. US acquirers will scrutinise your documents, contracts, share options and more. It’s sensible to have all your documents perfectly in order before you meet a potential acquirer, and prepare your Data Room. If your paperwork isn’t in order, US buyers might adjust the price or walk away from the deal.

Before you sign a Letter of Intent (LOI) with a US acquirer, ask a US M&A lawyer to check it and advise you.

More: Read Wilson Sonsini’s PDF, How to navigate a US acquisition

One-off investment? You can use a SAFE-style SeedFAST

Many US investors (angels and VCs) are familiar with a SAFE advanced subscription agreement – basically, the US equivalent of a SeedFAST.

UK companies shouldn’t download the YC SAFE template and use that – it’s Delaware law, includes US tax and SEC obligations, refers to ‘common stock’ instead of ordinary shares and so on.

But there is an easy solution if your US investor is asking for a SAFE: the SeedLegals English-law version of the YC SAFE. This agreement is appropriate for both your UK company and your US investor. It’s easy to create: log in, create a SeedFAST and select YC SAFE (English law version). (As always, if you need some help understanding the terms, start a chat with us and we’ll guide you through.)

Do the ‘Delaware flip’ only if it’s the deal-breaker

A UK limited company can do the ‘Delaware flip’ anytime – that is, incorporate a parent company in the state of Delaware – and it’s usually a tax-free transaction (unlike in some other countries such as Germany).

When is the right time to do the Delaware flip? You don’t ever ‘need to’ set up a US parent company to raise with US investors. But the US venture economy is based around investing in Delaware companies; the earlier stage the UK company, the less likely it is that a US VC investor will be willing to tolerate the friction of investing in a non-Delaware company. For funding rounds led by US VCs, the team at Wilson Sonsini says the likelihood a UK company needs to flip decreases at each round:

• Seed Round – around 80% of companies flip
• Series A round – around 20% flip
• Series B or later rounds – highly unlikely – close to 0%

If you’re at Seed stage and your US lead investor agrees to your terms but insists that you become a Delaware company, then you can build this into the Term Sheet: you agree that between signing the documents and the transfer of money, you’ll incorporate in Delaware. This protects you because it means you’ll only expend the time and money setting up a Delaware parent company when you absolutely have to. And it protects the investor because their money goes into the Delaware corporation and they don’t need to transact with the UK limited company.

About Wilson Sonsini

Wilson Sonsini Goodrich & Rosati started working with tech companies in the early 1960s, often taking companies from ‘garage stage’ startup to IPO and beyond. Famously, the firm incorporated Google in 1998, took them public in 2004 and still works with Google now.

Wilson Sonsini’s London office is led by American expat Daniel Glazer, with a team of 35+ US, UK and dual US/UK-qualified tech lawyers. Every year, the team incorporates US subsidiaries for several dozen UK companies and works with hundreds of UK and European companies throughout their US lifecycle.

If you have questions about expanding your company into America, raising with US investors or a US acquisition, take a look at Daniel’s comprehensive FAQs on US expansion, fundraising and exit

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