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.
As a companion to this guide, we also have a tongue in cheeky 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).
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?
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.
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.
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.
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.
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.
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.
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").
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.
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.
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.
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.
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:
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.
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.
Now is a good time to consider:
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.
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.
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.
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 £150k 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.
If you are raising more than £150k under SEIS and EIS then that’s fine, you can raise £300k, or whatever. You’ll allocate the first £150k to your SEIS investors and £150k to EIS.
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:
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.
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.
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.
To apply for advance assurance, you need to submit several supporting documents and forms to HMRC. These fall into four categories:
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:
Angels are, generally, busy people. You should do all you can to try and make their life easy. For example:
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.
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:
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:
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.
So, ultimately, this will come down to market demand. Angels that look at your business will most likely have their own scoring scheme (either documented or just by instinct) and will decide how much they are willing to invest in your business (if anything!) and at what valuation. This very much isn't a science - even for a data-driven investor, this will be a joint heart/head decision.
If it helps, a typical evaluation process for an angel could cover the following items:
One school of thought is that you should not disclose your PMV in the pitch. Instead, you find an investor willing to be 'lead investor' and negotiate the PMV with them. This then forms the PMV for the rest of the round.
Alternatively, 'guestimate' where your PMV should be - by testing your pitch and PMV with a couple of angels, by looking at similar companies and finding out their PMV etc - and then go to market and see if the valuation resonates.
This useful calculator helps you calculate the pre and post money valuation from the £ being invested and equity given for that investment.
Beauhurst also have a fascinating report which details the amount of equity retained by founders at different stages of their growth (Seed vs Venture vs Growth vs Established) - it is worth comparing your expected level of dilution with this report to make sure you aren't giving away too much equity or being unrealistic and aiming to give away too little.
Setting your valuation too low is clearly suboptimal - it means that you've given away more of your business than you needed to in order to raise your funding round. This may mean that future rounds are challenging as, at some point in the future, investors may consider that you've diluted too far.
Setting your valuation too high could have a number of negative consequences:
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:
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.
A proof point is an event between a funding round that validates your business in some way. Examples could be:
A proof point will generally significantly shift your PMV in the right direction, for obvious reasons.
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.
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).
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.
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:
The funding round itself has a number of steps:
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.
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.
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 now carefully consider how to engage with your investors on an ongoing basis - we offer some guidance in this helpful guide.
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.
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.
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