From unicycle to unicorn - your funding journey

From bright idea to fully funded

Introduction

We've got a number of blogs covering various elements of your start-up journey, but we thought it would be good to write one tying them all together and include some other important elements which we think you should be considering along the way.

Some are 'nice to do', some best practice, some essential if you are looking to take on investment and some are legal obligations. We specifically do not cover anything to do with your product, how to develop or market it, how to attract customers etc - this guide is solely about the funding aspects of your business.

We have some companion resources that may make the the equity fundraising process more transparent:

Some of the language used in the equity investment space may be unfamiliar, so our handy glossary might be a useful companion to this guide.
We have a tongue in cheek guide to how NOT to get funded too, that brings many of the issues we see in funding rounds to life in an easy to digest manner - it is worth reading to ensure that you aren't making any of these common 16 mistakes!
We've also got a detailed guide that you can share with your potential investors to explain much more about the investment process (and investing in general).

Too long; didn't read: If you want to cut to the chase and understand specifically how to use FounderCatalyst as a Founder, then we've got a series of walkthrough videos just for you.

Contents:

Every founder journey starts with a great idea
The founding team
How to split equity amongst founders?
Choosing a name
It's all about the branding
To incorporate or not?
Decide on a funding strategy
Web, marketing and comms
The other (really!) important stuff
Obtaining SEIS or EIS advance assurance
Preparing to talk to angel investors
Finding angel investors
How will angels assess your start-up?
Valuation
Why do people raise over multiple funding rounds?
Negotiating terms
The funding round itself
A word about warranties and disclosure
After the funding round
Working with an advisor on your round
A summary of the critical path
Undertaking another funding round
Further reading

Every founder journey starts with a great idea

So you've thought of a great idea, but is it unique? There is certainly something to be said for having an idea that gives you first mover advantage in the market.

But we wouldn't be too obsessed on an idea being truly unique. Facebook is a great example - it wasn't the first in its field and it wasn't the first to be successful either.

A potentially interesting strategy is spotting a great idea from another market or geography and shifting it or realigning it to another area. For example, Starbucks started when the founder brought Italian barista-style coffee to the US in 1971. It could be said Whitbread did the same with Costa in the UK over 20 years later in 1995.

Whatever your idea, hopefully you are excited by it and it passes the Ikigai test – bringing together your professional and personal interests and passions. If not, are you sure you want to dedicate a substantial proportion of your life to this endeavour rather than another venture?

The founding team

CB Insights states that "Not the right team" as the third most likely reason for a startup to fail, so making sure your team has the necessary capabilities and is suitably aligned is absolutely key.

Some investors have a strong desire to see an investee company have more than one founder, some are more relaxed with just having a single founder. Most investors will like to understand the broader team though and would ideally like to understand the credentials of the founding team, any other identified team members and any advisors to the board too.

So, why do investors prefer to see a broader founding team rather than a sole founder? Research shows: "Teams with more than one founder outperformed solo founders by a whopping 163% and solo founders' seed valuations were 25% less than teams with more than one founder." and this has been taken to heart as gospel - rather than other evidence to the contrary.

If you know you need a co-founder but don't have anyone in mind then worth considering joining Startup School - a free online service from Y Combinator. They offering a 'Founder Matching' service to help founders find a co-founder or two. Alternatively, take a look at jumpstart.

Many founders are still working full time in their 'pre-entrepreneur' job at the point they raise funding on the basis that they will quit when they close their funding round and then work full time in start-up. This is fairly common and most angel investors won't be disturbed by this at all.

Advisors / NEDs

In respect of board advisors / NEDs, investors may be encouraged to see one or more individuals support your board and management team - specifically to cover areas of any perceived weakness in your management team. As an example, if your founding team consists of a director responsible for marketing and another responsible for operations but you intend on outsourcing development efforts, then having an advisor with a strong technical background would be a serious benefit.

This article provides some great narrative around the different types of NEDs.

Adding to the board - Investor Directors or Board Observers

Sometimes, during funding negotiations, your potential investors will insist on:

An ability to appoint a non-voting "Board Observer". A board observer will have the right to attend all board meetings and receive all board packs and other similar information but not participate in voting.
Joining your Board as an “Investor Director”, though this is relatively unusual in early stage transactions. This means that the Investor Director will be come a statutory director and should be registered on Companies House as such. They will have the fulls rights of a Board Director so you should consider carefully before giving this right to an investor.

This article has a cautionary tales on board dynamics in VC backed businesses.

Founder Collaboration Agreement

Regarding the founder alignment, we very strongly suggest that you invest an hour to negotiate and document a Founder Collaboration Agreement at this stage and we provide a useful (and free!) founder collaboration agreement template for doing just this. An hour completing this template could save you from being part of a nasty statistic - that 65% of high-potential startups fail due to co-founders falling out.

How to split equity amongst founders?

One of the key considerations when setting up a business is how the equity in the company should initially be split across the founders. Some people opt for equal allocation, some people allocate based upon expected effort or some other up-front negotiation. Some people consider an alternative, built around allocating equity based upon the amount that a person contributes to a company over time. This is only relevant for early stage businesses pre-funding round but is a really nice way of preventing a number of challenging circumstances, such as a founder disappearing and keeping equity or people contributing more or less than was originally envisaged and having the wrong level of equity in the business.

This scheme is called Slicing Pie. You can buy the handbook on Amazon and there is also a handy Excel based calculator you can download for free.

At the point that you take on your first investment you should 'crystallise' peoples contributions (and therefore equity) at that point, but whilst you are bootstrapping the Slicing Pie seems like a very elegant way of tracking contribution and ensuring that leavers are treated in a way that is fair to both the exiting founder and everyone else.

It is standard practice in start-up land to link each founders shareholding in the business to a vesting mechanism. We've got an article describing the tax efficient way we handle vesting within the FounderCatalyst paperwork.

Owning your company via another company

"I already own a limited company, why don't I own my founder shares in this startup via that limited company" is a vaguely common idea, but:

(a) There are rules around SEIS / EIS companies being a subsidiary of other companies. If your limited company is going to own more than 50% of the startup, this could be a problem.

(b) It is very unusual for this structure to be seen in practice. I’ve seen it once or twice and it looks unusual to an investor.

(c) A common thought is that dividends can be paid to your limited company...But investors don’t want to hear about dividends – they want fast growth and an exit, investors don’t want dividends. It smells very close to item 15 on this list

(d) In any material exit, it's unlikely you’ll be able to make use of business asset disposal relief (previous known as entrepreneurs relief) if the shares are owned by a company.

Choosing a name

A unique, catchy name that all founders agree on sounds simple, right?! In my experience, it takes much longer than expected to land on a perfect name – partly because it’s so subjective, and partly because so many great names have already been snapped up by someone else. We provide some advice on this topic.

Once you've finalised the name, it is a great idea to create relevant accounts on social media to ensure people don't register them when they see your company being incorporated. Your sector, model (b2b vs b2c) and demographic will dictate which social media platforms are going to be most important. For services aimed at professionals, LinkedIn is a must. For apparel aimed at a younger audience, maybe Tik Tok or Snapchat.

It's all about the branding

So you've picked a name - designing a logo and associated branding should be straightforward? Not in our experience, it's just as challenging and time consuming.

We really like using 99designs - it's excellent value (important for any startup), straightforward, relatively swift and the results are usually very good.

Once you've selected a name and logo you may want to consider trade marking either or both. Applying for a trade mark takes time and money and some people consider it unnecessary. Trade marks only cover the classes that you apply for and you need to pay per class. There are also nuances around applying for a series of trade marks.

We have seen start-ups create an (un-trade marked) recognisable brand and then be bullied from using the trade mark by someone who filed to register it (see "first to file").

To incorporate or not?

First you need to decide whether to incorporate as a limited company or adopt another structure. We've covered that topic in depth in another blog but if you want to take on funding then you'll almost certainly incorporate as a limited company.

If you decide to incorporate then the process of actually incorporating is relatively straightforward - we cover that in this element of the blog.

Keep in mind that you'll need your startups Unique Taxpayer Reference (UTR) number from HMRC before you can apply for SEIS/EIS advance assurance, if that is important.

A note regarding having sufficient shares in circulation

Ensure that you have enough shares in circulation so that the maths work out correctly for the particulars of your round. For example if you and your founders have 100 shares between you and your PMV is £1m then every additional share you offer costs £10,000. What if someone wants to invest £25,000? Well that's not possible - you can only sell then 2 or 3 shares, so they can invest either £20,000 or £30,000.

Many founders have incorporated their startup with far too few shares - 1, 100, 1000 are common. You may therefore wish to consider sub-dividing shares ("doing a share split") before taking on investment - we've got a handy guide on this very topic.

If you are incorporating a new company, then it makes sense to get this right from the start. Incorporating with 100,000 shares at a nominal value £0.01 means that you need to transfer £1,000 to ensure that the shares are "fully paid up" and having 100,000 of shares in circulation gives plenty of flexibility when undertaking any funding round.

And what about subsidiaries?

When looking to take on investment, the motto 'KISS' (Keep it simple stupid) should certainly be applied in this respect. The vast majority of companies we see seeking investment are single company entities. This reduces complexity and is easier / cheaper to manage.

There are many reasons why people may consider a group or parent with subsidiary / subsidiaries is appropriate but the SEIS/EIS legislation applies some constraints to these structures.

The key rule to keep in mind (there are more - the devil is truly in the detail!): SEIS/EIS investment can only be made into the ultimate parent organisation. It is not possible to take SEIS/EIS qualifying investment in any subsidiary. This alone may make a group structure unattractive.

Also worth noting that the company "has not been controlled by another company since the date of your company being incorporated" - so you can't 'spin out' a subsidiary and then be eligible for SEIS or EIS.

More details can be found via HMRC.

Incorporation expenses

A note on expenses - you will no doubt incur costs before you have incorporated. Examples of these expenses could be fees for logo design, for virtual registered office services or paying an advisor such as a solicitor or accountant.

You can / should keep a note of these and keep the receipts and claim these from the company as a business expense. This is an entirely reasonable thing to do and any investor would not be surprised to see these costs.

If the company cannot afford to pay these expenses immediately - for example until you obtain external funding - then it is reasonable to add them to a director's loan account.

Building an ethical business?

Many founders wish to build a business which is socially responsible. This could mean the business fully embraces ESG (Environmental, Social and corporate Governance factors) or a subset that suits the founder / the type of business.

There are some useful resources available if you wish to explore:

Tech Nation have a great resource on how to build and run a business which embraces Diversity and Inclusion.
We see many business adopting (or working to obtain) B Corp status. The FounderCatalyst paperwork can be made 'B Corp compliant' - see our blog for more details.

A note on the National Security and Investment Act

If your business is in one of the following seventeen areas then you (and your investors, for sure) should consider the implications of the NS&I Act, which came into effect Jan 2022.

For reference, the relevant areas are:

(a) Advanced Materials; (b) Advanced Robotics; (c) Artificial Intelligence; (d) Civil Nuclear; (e) Communications; (f) Computing Hardware; (g) Critical Suppliers to Government; (h) Critical Suppliers to the Emergency Services; (i) Cryptographic Authentication; (j) Data Infrastructure; (k) Defence; (l) Energy; (m) Military and Dual-Use; (n) Quantum Technologies; (o) Satellite and Space Technologies; (p) Synthetic Biology (formerly known as Engineering Biology); and (q) Transport.

Decide on a funding strategy

Once you've got the above covered (or at least underway!) you will want to consider your sources of funding - we've written another couple of blog posts on the types of funding available for you to consider. This includes grants, debt options including bank debt, equity options including crowdfunding, angel investors or VC.

Web, marketing and comms

Now is a good time to consider:

Your website - this will take longer to build than you think - especially putting together the content that will populate the site. Investors of any type will generally expect to see some kind of web presence when you start speaking to them about investing.
How are you going to launch and handle communications in general? This really is important as it covers how the outside world will view your business – from the words you use to describe it, to your place in the market. Some of the skills you may have in your team, for example you may have some enthusiastic users of social media, others you may need to bring in when the time is right – for example digital marketing. We've got a blog for that too.

The other (really!) important stuff

There is a laundry list of other things to do, and the following is a non-exhaustive list of things to consider. We have not tried to describe the dependencies here - and the items are not necessarily in the correct order for your circumstances. There are some interesting complexities - for example, any investment money under SEIS or EIS must be paid into a company account, for example - so you need a bank account before you can take on investment.

Get a bank account - on the face of it this is straightforward but during the Corona pandemic most high-street banks stopped offering new accounts. If you need a bank account in a hurry then some customers have had success with Starling, Tide or Revolut.
Accounting - you will most likely need some support in this area, but maybe not immediately. Many start-ups use online accounting packages like Xero, associate this with their bank account and engage an accountant a little later. Finding an accountant you can work with and trust is really important, though. A good approach is to ask friends and family for a recommendation.
Insurances - this certainly deserves a blog of its own. You must consider the insurance requirements, if any, in light of the specific nature of your business. Your options include, but are not limited to, the following - we would recommend that you speak with an insurance broker to confirm that you are considering the appropriate policies. Whilst we don't recommend specific companies, we personally love the service offered by Fuelled - responsive, knowledgeable and even saved us 50% over a rival quote. Anyway, insurances you may wish to consider:
- Employer liability insurance - you are legally obliged to have this in place when you take on your first employee. The law dictates that you need a minimum of £5m EL insurance, but don't be concerned - all insurers cater for this by default and the premiums are usually relatively cost effective. Also, don't forget that you are obliged to provide a workplace pension for your employees too. You should ensure that you issue a contract of employment in writing to each employee too - thankfully we've got a free template employment agreement. Oh, and there are some mandatory policies that you need to work through too.
- Public liability insurance - essential if your business ever comes into contact with members of the public. Again, this is a relatively cost effective insurance and well worth considering if any part of your business involves leaving home!
- Professional indemnity insurance - nearly essential if your start-up will offer a service or advice to a business or individual or you manage external data or intellectual property. Unfortunately, this is insurance can get very expensive, very quickly.
- Building, contents & stock insurance - do what they say on the tin. You will know if these apply to you.
- Product liability insurance - If your company manufactures or sells a product that has a defect and that defect causes injury or property damage, your business could be held liable. Product liability insurance is essential if this risk is relevant.
- Directors and officers - also known as D&O insurance, covers the cost of claims made against your business's directors for alleged wrongful acts including breach of trust and breach of duty.
VAT registration - hopefully at some point this will be necessary, but maybe not a consideration at this stage. You should certainly keep this in mind when your business is approaching revenue generation and certainly as you approach the VAT threshold.
Information Commissioner’s Office registration - as a minimum, you need to register with the ICO if you collect information about individuals for any reason other than your own personal, family or household purposes. GDPR, Data Protection Act 2018 and ICO registration is a complex topic - we would recommend you visit the ICO website to start with and consider seeking professional advice if you consider these regulations apply.
R&D Tax Credits - the government offer this amazing scheme to allow SMEs to obtain tax credit against qualifying spend. This can be worth tens or hundreds of thousands of pounds a year, depending upon your type of business. It is estimated that 7 out of 10 businesses that could be claiming R&D tax credits are not doing so - make sure you aren't one of them. We don't offer any services relating to R&D tax credits, but our friends at THIS R&D specialise in these claims.

We think it's also vital to educate yourself on the risks associated with being a director. Whilst being incorporated affords you some protection, you should read our article on the residual risks of being a director in a limited company.

Obtaining SEIS or EIS advance assurance

If you decide to raise funding utilising the SEIS and/or EIS schemes (and this is why you should) then you will want to apply for advance assurance. We provide all of the help that you need to undertake this step for free when you sign up to use FounderCatalyst for your funding paperwork.

It is worth reading our recent analysis which demonstrates the impact of EIS to an angel investor's average rate of return.

How quickly will HMRC respond? The response from HMRC on an advance assurance application is variable. The fastest response seen is a positive "You've got advance assurance" email in 2 days, the longest (even without queries / changes) is over 45 working days. This was during Corona so HMRC had their hands full, we imagine. In any event, you should plan on a minimum of a two week turnaround just to be safe.

Given that some angel investors won't even consider looking at investing in your business until advanced assurance is confirmed, you should apply for this sooner rather than later.

How much can I raise under EIS and SEIS?

You can raise up to £150,000 under SEIS in total, and up to £5 million each year under EIS, to a maximum of £12 million in your company's lifetime. If your business is classed as a "Knowledge Intensive Company" (KIC), then these figures change to £10m per year up to a maximum of £20m.

Remember that any state aid which is classed as "de minimis" needs to be deducted from the £150,000 maximum figure for SEIS. This is due to the fact that there is an overall cap of £250k on all de minimis aid and SEIS itself counts towards this figure. As an example, if you've received £15k in Innovate grants under a de minimis scheme then you can only raise £135,000 under SEIS.

Raising more than £250k in your first round

If you are raising more than £250k under SEIS and EIS then that’s fine, you can raise £300k, or whatever. You’ll allocate the first £250k to your SEIS investors and £50k via the EIS scheme.

The timing is really important – if you accept even just £1 of EIS investment before or on the same day as SEIS investment then you may destroy the SEIS relief entirely.

In the above, you’ve got two choices on how to allocate SEIS and EIS across your investors:

First come first serve – the first investors committing to invest get SEIS and once you’ve used the full allocation, investors get EIS from this point onwards. This is great for early investors, but your later investors in the same round may quibble about why they are only getting 30% relief whilst earlier investors get 50%.
Pro-rata – each investor would get half of their money invested under the SEIS scheme, the other half under EIS. You need to be VERY careful to ensure that you receive investment cash and issue SEIS shares a whole day before you take any EIS investment payments.

Should I just get advance assurance for SEIS?

Producing an advance assurance submission is time consuming. Even if you are unsure if you will ever need to undertake an EIS based funding round, it makes sense to seek advance assurance for both SEIS and EIS at the same time rather than have to do two submissions - adding EIS to an SEIS advance assurance submission is just adding one further form - 95% can be copy and pasted from the SEIS form anyway.

Similarly, if you are eligible as a KIC under the EIS scheme, it may make sense to apply for this initially rather than re-apply at a later date.

Am I a qualifying trade?

Before you start your application, it's worth checking the guidance for both SEIS and EIS to ensure that your company is eligible for the scheme(s). Most importantly make sure that your business is undertaking a qualifying trade. The vast majority of companies do qualify, but you still need to check.

Is my business 'in time'?

Strict time limits apply to companies wishing to seek investment by both SEIS and EIS. In brief, a company must receive all SEIS investment within 2 years of starting to trade. For EIS this is a more generous 7 years. There are nuances, but in general 'starting to trade' means the date of first commercial sale. There are lots of other rules to consider.

So, if your business has been running for 3 years but you really want to take advantage of SEIS, could you simply close your existing business and start a new company? Not so fast: as part of their standard due-diligence before approving advance assurance, HMRC will check Companies House and other records to apply the test: The first commercial sale is taken as the earliest made by any person who previously (at any time) carried on a trade which was subsequently carried on by the issuing company.

What documents will I need to apply?

To apply for advance assurance, you need to submit several supporting documents and forms to HMRC. These fall into four categories:

Those produced by FounderCatalyst and found in your Intelligent Data Room, such as Articles of Association and Shareholders Agreement;
Those created by you for your investors as part of the fund-raising round: pitch deck and 3-year financial forecast.
Other company documents you need to provide; and
Specific forms that HMRC require you to complete.

Preparing to talk to angel investors

To take on investment from angels, you'll need to have a pitch deck and a forecast model as a minimum. If this is an SEIS round then most investors will understand if you don't have a full business plan in place at this stage. For further rounds it will almost certainly be required.

We have a blog on how to create a great pitch deck specifically. YC has great guidance too - it is aimed at Series A funding but most of the suggestions are equally useful for a seed round.

It depends upon how sophisticated your angel investor is, but whenever I am approached to invest, I quickly work through the following preliminary questions:

Can I see your pitch deck, proposed term sheet & 3 year model? You should have these to hand (you'll need the pitch deck and 3 year model as a minimum to apply for SEIS/EIS advance assurance). If not, then it is worth producing them and polishing them before reaching out to any potential investors. You can produce a term sheet for free on the FounderCatalyst platform.
How much are you raising and at what valuation? How much is already committed? Ok, this is 3 questions but they are all related and hopefully very easy to answer. Lots of founders avoid putting the valuation in the pitch deck which is odd as its the very next thing they'll be asked by potential investors.
Are you SEIS or EIS eligible? If so, do you have advance assurance in place? Many angel investors will only consider investments that are SEIS or EIS eligible and even then they will only start considering your investment in earnest once you have advance assurance confirmed.
Do you have a lead investor in place? Many investors like to see a lead investor in place. The lead investor typically has a number of functions - they will lead the due diligence process (meaning that the other investors don't have to do the heavy lifting), lead the negotiation on behalf of other investors and will typically be part of the ongoing advisor team.

Making life easy for potential Angel Investors

Angels are, generally, busy people. You should do all you can to try and make their life easy. For example:

There are rarely second chances - don't approach angels until you have your ducks in a row - ie you have a polished pitch deck, you have advance assurance in place etc;
Consider the timing of your round carefully;
Be responsive to angels when they inevitably ask questions about your your investment proposition;

Thinking of setting a minimum ticket size?

Some founders prefer to set a 'Minimum investment of £20,000' or similar. The theory being that you need to talk to a lot of investors if you are trying to raise £300,000 and people are contributing just £5,000 at a time.

A strong counterargument is presented in this blog. The example is from the US but I think the same principle applies here: they secured about of their funding rounds from an investor who personally only invested $5,000 but made a number of introductions that resulted in $700k being invested.

Finding angel investors

You may have already found your investors - either family and friends or via contacts from industry. However, if you need to find your angels then FounderCatalyst has partnered with a couple of organisations whose raison d'être is to match founders to investors. We will make personal introductions to these organisations and explain the pros and cons to the options.

Broadly these options are:

Angel Networks / Private Equity clubs. Most of the times (but not always) these will charge a fee for arranging your investment but can often be a 'one stop shop' where a founder can obtain a full round of funding in one place.
There are matching platforms that connect founders and angel investors. Often free but require you to 'kiss more frogs' than some of the other options.
The UK British Angels Association (UKBAA) offers a DealShare platform where deals are shared with hundreds of corporate / institutional members and tens of thousands of individual members, and many scour DealShare for new interesting potential investments.
Use a broker, who will act as a virtual member of your team to: 1) go to the market and hunt out investors who are keen to invest in businesses like yours; and 2) open their little black books to match you with some of their investor contacts. This typically attracts a % fee payable on funds that they directly find. The benefit to using a broker rather than a Private Equity Club is that a PE Club would typically negotiate a tougher set of terms on behalf of its members compared with individual investors found by a broker.

Timing a funding round

You will want to consider when to run a funding round. Essentially, a funding round is a 'numbers game' - getting your pitch in front of as many appropriate potential investors as you can.

This has a number of implications:

You should time your funding round for a point of the year when most angels are actively investing. School holidays are a very slow time and July, August and Decembers specifically are bad months to try to get in front of angels, for obvious reasons.
Trying to close a funding round just before a tax year closes often causes unnecessary stress (for both founders and investors) as some investors will need to claim relief in a certain financial year - if the deal slips into the next FY then this can cause problems - or indeed the investor may choose to not invest.
You should keep in mind that most investors who are looking to invest under the SEIS or EIS scheme have a finite amount of tax relief to use. If you reach out towards the end of a financial year then you may find that either: i) they are out of tax relief and therefore can't invest; or ii) they will be keen to use the last of their relief.

How will angels assess your start-up?

We've got an article which speaks more about this.

Valuation

A round's pre-money valuation (PMV) is always an interesting topic. For later stage businesses, there are rafts of market standard ways of valuing a business (multiple of EBIT, multiple of revenue, discounted cash flow, First Chicago Method, the Berkus method and many others).

It is rare that those methods are useful for first round valuations, though. Businesses at this stage may not even have an MVP in the market and almost certainly won't be scaling yet.

See our much longer article here we deep dive into valuation.

Why do people raise over multiple funding rounds?

There is a great tool which allows you calculate your timescale to break even and how much you will need to raise in total based upon your revenue, your revenue % growth and your costs.

After all, if you know you need to raise £900k in the next two years, why not just raise it all up front?

In very early rounds, your company will have a relatively low valuation. Many businesses go for their first raise with just a bright idea and a shiny pitch deck. At this point, your business will have a low valuation - almost certainly less than £2m. As an example, if you raise £900k of funding at a £1.5m valuation then you end up diluting yourself to 62.5% ownership of the company, so you should try to avoid that.

Instead, if you structure the funding rounds as follows:

An initial round of £150k at a PMV of £1.5m.
A further round of £600k at a PMV of £3m once the business has hit some proof points (see below) along its journey.
A final round of £1.25m at a PMV of £5m once the business has hit further proof points.

Then the founder retains 72.96%. Proof points really matter when you stagger your fund raising tranches.

As a rule of thumb, after the first round most founders would aim to increase their round size by around 4x for each round with valuation increasing at a similar rate. To do this, you need to hit these proof points. Hitting proof points takes time, so you need to ensure that your funding round is sufficient to meet your forecasted spend before you reach the proof point (and therefore, ideally, your next funding round). It is important to build contingency into your forecast; as a generalisation, a funding round will always takes longer than you expect, you'll hit unexpected costs along the way and the revenue may well be slower in ramping up, too.

Proof points. Eh?

A proof point is an event between a funding round that validates your business in some way. Examples could be:

Filing for a patent. Even better, patent being awarded
Releasing an MVP
First pilot customer
First paying customer
First month of profitability
Launching a new product line
Being stocked in a new high shipping / high profile outlet

A proof point will generally significantly shift your PMV in the right direction, for obvious reasons.

How much equity should I try to retain?

Ideally, you and your founders should try to retain 75% or more of the voting shares. If that is not possible, and in businesses requiring multiple funding rounds it most likely won't be, then aim for 50% of more.

Don't forget about an employee share option plan

Creating a share option plan is a great way of incentivising your employees in a tax efficient manner. Even if you don't have employees to incentivise in this way quite yet, don't be surprised if an investor insists that you create an option pool before they invest - they will realise that you'll want to create one at some point and, for an investor, it's in their interest to create one before they invest rather than after as any employee share option plan will dilute their shareholding.

It is worth pointing out that employee option pools and the individual option allocations don't carry voting rights, so for the purpose of the previous section the allocation of share options doesn’t reduce % voting rights held by the founder(s).

The impact of multiple rounds

See this amazing visualisation demonstrating a typical funding journey, covering the allocation of founder shares, an option pool, a seed round, multiple further rounds and an eventual exit.

Negotiating terms

The terms on which you accept any investment can be emotive for both founders and investors. We've got an entire article covering just that.

YCombinator offers sound advice on this matter: 'When an investor says they're committed to partnering with you for the long-term, but their terms suggest otherwise, always believe the terms.'

The funding round itself

The FounderCatalyst platform produces the formal legal paperwork that you need to adopt on a funding round and helps you manage your investor engagement through the whole funding journey to the final signature.

We take a detailed look at the documents produced during a funding round in another article.

The process to complete a funding round can be undertaken in 30 minutes (the latency caused by founders, investors and shareholders will usually mean that the process really takes a week or two) and consists of the following:

A founder creates their free account and enters a few personal details.
The founder adds the start-up company to the platform by entering its registered number. We then download relevant details from Companies House to save you typing that detail in yourself.
You confirm the details of your co-founders, if any, and invite them to the platform.
You add details of your current capitalisation table.
You are now ready to start a funding round.

A note of caution: Raising SEIS and EIS in the same round

It is possible to raise both SEIS and EIS in the same round, in what is known as a 'dual round'. You achieve this by inviting the same investor twice to the platform - once with the SEIS details and again with the EIS.

You need to be very careful ensure that you receive all of your SEIS investment monies, wait a day and then receive EIS investment cash or SEIS eligibility can easily be destroyed.

We have a guide which to undertaking a dual round safely.

The funding process on FounderCatalyst

The funding round itself has a number of steps:

Enter the details of the round - we provide plenty of hints and tips along the way and, wherever possible, offer sensible default positions. At the end of this stage we produce a complete set of documents for you to review.
Invite your investors to the platform. They will need to sign a non-disclosure agreement, an investor consent declaration and the term sheet before they get full access to the platform.
You will now negotiate terms with the investors. If you need to change any of the terms you've already entered or invite/remove investors, you can still do this. When the negotiation is complete, click the "lock round for signing" option.
You can then track the signature process - we tell you who has signed which documents and you can chase any of the remaining signatures.
Once everything is signed, the round is complete. The last thing to do is mark the investment money as 'received' on our platform and we will issue share certificates to each investor.

A word about warranties and disclosure

If you've never been involved with a fund raise then one of the more confusing parts of the process is warranties and disclosure, so we've got specific guidance on this step.

Working with an advisor on your round

We think we've made a complex process as simple as possible, but some people may still want the comfort of an advisor to provide formal advice at key points - such as the warranty and disclosure process, maybe.

If this feels like something you'd like to do then here's a little more on this feature.

After the funding round

Once you have received the investment money, there are some formalities that need to be undertaken. This includes filings with Companies House and managing the SEIS/EIS process. If your funding round included SEIS or EIS, then make sure that you are aware of the potential ways of accidentally destroying the tax relief for your investors.

You should carefully consider where to keep the investment monies - the Silicon Valley Bank saga of 2023, as well as the banking crisis of 2008 has demonstrated that even huge banks are vulnerable to collapse. The government offers saves, including your startup potentially, safety under the FSCS, but this only covers £85,000. You should consider spreading any balance above this limit across multiple banks to ensure that you are protected. Note though, that the £85k FSCS limit is per banking license...If you put 85k in each of RBS, Natwest, Coutts, Ulster Bank, Isle of Man bank then you'd get FSCS cover for just £85k, not the expected £425k, as they all operate under the same license.

You should now carefully consider how to engage with your investors on an ongoing basis - we offer some guidance in this helpful guide.

A summary of the critical path

On the basis that you wish to get to the point of 'fully funded' in optimal time, the critical path is very likely to be:

The other items (insurances, logos etc) are all really important, however you will no doubt be able to fit those around the above activities - they are unlikely to cause a 'day for day slip' if you don't undertake them immediately.

NOTE The uncertain, long lead time item in this chart is receiving SEIS/EIS advance assurance. Again, we urge founders to submit applications as soon as you have the pre-requisites in place.

Undertaking another funding round

Some startups raise a single round and no more, but many startups raise a number of times over a number of years.

All initial funding rounds undertaken on the FounderCatalyst follow an identical process to ensure that the startup has all of the legal paperwork required in place, such as the obvious 'material' documents (the shareholders agreement and articles of association) and the supporting documentation, such as IP assignment and founder service agreements.

Later funding rounds come in different flavours on FounderCatalyst. We explore the alternatives in more depth in another article.