Decide whether equity fits
Equity suits a company that expects to grow fast enough to give investors a return when they sell their shares, usually through a sale of the company or a stock market listing. It suits a business run mainly to pay its owner an income much less, because investors expect a share of the value on exit. Compare it with a loan, a grant or reinvested profit before you start.
Each round dilutes the people who already hold shares. If you sell 20% of the company in one round and another 25% in the next, your 100% becomes 80% and then 60%. Investors may also ask you to set aside shares for an employee option pool, which dilutes you further. Model the effect across several rounds before you agree a valuation.
Know who invests
Friends and family often invest first, in small amounts on informal terms. Put the terms in writing and make sure they understand they could lose their money. Corporate investors are established companies that invest for strategic reasons, such as access to customers or technology. Equity crowdfunding campaigns generally work on an all-or-nothing basis: if you miss your target, the money goes back to investors.
Stay within the rules when you approach investors
A private company must not offer its shares to the public, and it breaks the law if it allots shares with a view to offering them to the public. An offer to a section of the public, however selected, counts. An offer that is really a private concern between you and the person receiving it does not, for example an offer to existing shareholders or employees.
Separately, an invitation to invest is a financial promotion. Unless you are an authorised firm, your promotion must be approved by an authorised person or fall within an exemption in the Financial Promotion Order, such as those for investment professionals, high net worth individuals and sophisticated investors.
Use tax relief to attract investors
Tax relief for investors makes a share issue easier to sell. The relief depends on the age and size of your company.
Raise the money
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Prepare your pitch and records
Write a pitch that sets out the problem, your solution, the market, your progress, your team and how much you want to raise. Build financial forecasts with clear assumptions. Gather a data room with your accounts, contracts, shareholder records and proof that you own your intellectual property, because investors will test what you tell them.
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Check whether SEIS or EIS could help
Ask HMRC for advance assurance before you approach investors: it shows them the share issue may qualify, though not whether their own investment will. Make a separate application for each proposed investment. HMRC asks for your business plan, forecasts, articles and register of members, and may ask for your prospective investors' names.
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Approach investors
Use introductions from advisers, angel networks, accelerators and other founders, and target investors who back your stage and sector. If you use an equity crowdfunding platform, it will tell you what it needs from you before your campaign goes live.
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Agree terms
Interested investors will propose a term sheet covering the valuation, the amount and the rights they want, such as a say over major decisions. The investment agreement and new articles that follow set the binding terms. Ask a solicitor experienced in investment rounds to review them, because the terms last for years.
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Get through due diligence
Investors will check your finances, contracts, ownership of intellectual property and legal compliance. Answer questions quickly and keep your data room up to date.
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Issue the shares
Check the directors have authority to allot the shares, from the articles or a shareholders' resolution. Offer the shares to existing ordinary shareholders first, in proportion to their holdings, unless pre-emption rights are disapplied or excluded. Deliver a return of allotment (form SH01) with a statement of capital to Companies House within one month, and update your register of members and your register of people with significant control. If you used SEIS or EIS, give each investor their compliance certificate once HMRC has authorised it.
Legal basis
Primary legislation and key regulations
Official guidance
Understanding crowdfunding (FCA) (opens in a new tab)
FCA
British Private Equity & Venture Capital Association (opens in a new tab)
www.bvca.co.uk
UK Business Angels Association (opens in a new tab)
ukbaa.org.uk
Apply for advance assurance on a venture capital scheme (opens in a new tab)
HMRC
Return of allotment of shares (SH01) (opens in a new tab)
Form or Template · Companies House
FCA financial promotions guidance (opens in a new tab)
FCA
Tax relief for investors using venture capital schemes (opens in a new tab)
HMRC
Apply to use the Seed Enterprise Investment Scheme to raise money for your company (opens in a new tab)
HMRC
Apply for SEIS/EIS advance assurance (opens in a new tab)
HMRC
Use a venture capital scheme to raise money for your knowledge intensive company (opens in a new tab)
HMRC