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Making your Founder / Funder relationship work

Last updated
29th April 2022
Written by
Sam Simpson

How to navigate the “relationship rules” post-funding

Going through funding rounds can sometimes feel a bit like dating. Exciting, scary, overwhelming, frustrating and always unpredictable. And like every relationship, the real work starts once you’ve found each other.

Figuring out the rules of engagement for a founder / funder relationship are unique, personal and rarely formulaic. So, the question is… once you’ve found your match, how do you navigate what comes next?

FounderCatalyst COO Sam Simpson explains the top two things every new couple has to figure out:

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1. Define the rules of engagement with your new significant other

Once you’ve secured your new funding partner, the first thing that’s worth considering the different levels of engagement you can expect from investors. This is to say, what are they offering to the relationship. Figure this out early on so you know what to expect from your new partner(s) going forward.

Broadly, investors can be grouped into three types in respect of their ongoing involvement:

2. Figure out how best to communicate

In any relationship, communication is key. There are some things you have to share with your new significant other, and some things that you want to because it’s the right thing to do.

That’s the same when it comes to a funder/founder relationship, so it’s important that you really spend time figuring out what information you need to share, and how you keep them updated. I’ve divided this into two scenarios: formal obligations and those that are generally considered as ‘good practice’.

Formal Obligations

These are things that a founder must do, either due to the Companies Act or, very likely as part of a contractual obligations under a shareholders’ agreement. These include adhering to:

  1. Passing a resolution: To undertake some corporate actions (for example appointing a director, changing the name of the company and adopting new articles of association) you need to pass either an ordinary resolution or a special resolution. Typically, an ordinary resolution will require 50% of shareholders to approve, a special resolution 75%. You do not always need to have a meeting to pass a resolution. If enough shareholders or directors have told you they agree, you can usually confirm the resolution in writing. However, you must write to all shareholders letting them know about the outcome of a resolution. Don’t forget you must also file resolutions with Companies House within 15 days of passing them.

  2. Investor Consents: if the company wishes to borrow money or issue a dividend and these actions are covered by a consent then they need formally reach out and ask investors for permission to do this. They can only undertake the action if they get sufficient consent (usually 50% of investor shares is sufficient – ie a majority or investors).

  3. The pre-emption process: this will be detailed in the Articles and defines the process the company should following when offering new shares. Typically, this involves giving existing shareholders a first right of refusal on new shares.

  4. Any contractual Information Rights: this is a formalised obligation for the founders to supply investors with certain information (usually management accounts etc) on a certain cadence (i.e. monthly / quarterly / yearly).

In some instances, none of these rights will exist, in other cases all will exist – it varies depending upon the specific rights agreed in the articles, shareholders agreement and any other relevant documents.

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Good Practice

One my main gripes with many start-ups is that they take the investment cash, and then you only hear from them when:

I am very unlikely to invest in further rounds when this is the case, and much more likely to invest where a Founder is more communicative.

I’ve had examples where a business has fundamentally pivoted their purpose without communicating this change, who haven’t communicated at all for 2 years and then finally get in contact to ask for further investment. Errr, no!

What does ‘good’ look like? This is a little subjective and will depend upon the preference of individuals, but here are some principles to live by:

Regular updates

These should be issued consistently with a reasonable cadence. There is a balance to be had: an investor doesn’t want a founder to be distracted with an endless treadmill of update documents. But a quarterly update in most businesses would be fine. This should consist of:

It is unlikely that you get this perfect first time – but issue anyway and solicit feedback from investors. Visible VC Blog offers some useful templates

Exceptional Communication

‘Manage by exception’ is a great mantra – in short, your investors should expect to receive regular updates but little in-between, unless something exceptional (this could be good or bad news…though it’s usually bad!) in which case the investors would want to know immediately so they can support you as appropriate.

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Good luck you funding love-birds!

All relationships are built on trust, and more often than not, that trust is built on communication. It’s therefore important to make sure you figure out the “what, who, how and when” of communication with your new match.

What to say, to who, how to say it and crucially the right time to say it.

Get this figured out early on, and this could be the best relationship you’ll ever have. Get in wrong, and you could find yourself back on the funding-dating scene before you know it.

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