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Navigating later funding rounds

Written by
Charles Frank
Last updated
10th November 2021

So, you have got your first funding round with FounderCatalyst under your belt, but now need to raise additional funds to continue your growth.

First, congratulations – few start-ups make it to this stage. You have probably worked out by now that it’s never easy to find equity funding.

Second, you now need to understand the mechanics of undertaking your follow-on investment, including communicating with, and managing, your existing shareholders.

In this article, we discuss the required steps, including the documents that the FounderCatalyst platform produces for you. These steps reflect the requirements for an issue of new shares that is not an issue of “Additional New Shares” under your subscription and shareholders’ agreement (SSA).

The documents you need

The documentation process is straightforward and all managed on the FounderCatalyst platform. You need: board minutes, potentially (see below) an investor consent letter, a shareholder resolution document, a subscription and adherence agreement, a disclosure letter and share certificates. The platform will take you through each of these stages, but here is a short summary of what each document does:

Board minutes: These provide all authorities required from your company’s directors in order to complete the investment and issue the new shares.

Investor consent letter: This is only required if you selected “Investor Consent” as a pre-condition to issuing new shares. This is an Advanced Round setting when you undertook your first funding round and the default is Yes. If you did include consents, this letter, produced by the FounderCatalyst platform, allows your company/the founder(s) to obtain consent to the proposed issue of new shares under the terms of your current SSA. Investor Majority Consent is defined as consent from the holder(s) of more than 50% of all shares held by existing “Investors”. When undertaking your follow-up investment with FounderCatalyst, the platform produces a letter than we share with all existing Investors, asking them to provide their formal consent through countersigning the letter. This is signed on the platform and we keep copies for you.

Shareholder resolution: This document provides shareholder authority to the Board to issue the new shares under UK company law. It also waives the existing shareholders’ pre-emption rights - more on this below. These resolutions need to be signed by the holders of at least 75% of the shares in your company. The platform produces this document for you and messages all existing shareholders requesting that they sign accordingly.

Subscription and adherence agreement (SAA): In a way, this is a mini subscription and shareholders’ agreement that will sit alongside your existing SSA. It covers the mechanics of the issue of new shares, sets out certain conditions that need to be satisfied before the issue can take place (and which are all managed on the FounderCatalyst platform) and includes a set of “warranties” that will be given to the investors by the company and its founder(s) (in the same way that this happened under the original SSA).

Disclosure letter: As with your original SSA, this provides an opportunity for the company and its founder(s) to qualify the warranties to be given by them in the SAA. This disclosure process is identical to the process you undertook in the first funding round but is required in case circumstances have changed and you need to make different or additional disclosures.

Managing existing shareholders/investors

As mentioned above, any issue of new shares will dilute any existing shareholders who decide not to participate in this round. Don’t forget, it will also dilute the shareholdings of existing shareholders who do participate unless they take up full pre-emption rights.

The great majority of follow-on equity funding rounds by start-ups do not follow a right of first refusal, or “pre-emption” process. This is where all new shares are taken by existing shareholders in line with existing shareholding percentages. However, it is almost always the case, and as per the FounderCatalyst documentation, that existing shareholders do have this right enshrined in their articles of association/shareholders’ agreement, and/or under UK company law.

So, if you want to raise additional funds and issue new shares outside of this pre-emptive framework, you will need consent from the majority (75% or more in terms of shares held) of your existing shareholders. The 75% includes Founders shares too, don’t forget. You can do this on the FounderCatalyst platform via the “shareholder resolution” document referred to above.

But, of course, before you send this document to your existing shareholders and ask them to waive their pre-emption rights for this round, it’s always better to communicate with them and explain what they will be sent and what its purpose is. In any case, you are more than likely to have told them about the raise, why you are doing it and what you are going to be using the money for. An investor is much more likely to sign a pre-emption waiver if they first understand what they are signing, and why. So, we’d always recommend that founders pick up the phone and speak to existing shareholders before triggering any document delivery to them on the FounderCatalyst platform. Receiving such a request out of the blue is not likely to be positively received!

If your existing shareholders choose not to waive their pre-emption rights, then this effectively means they wish to participate in your funding round – good news! You then need to ascertain how much they wish to invest and add them as a participant in the funding round on the FounderCatalyst platform. The process then follows exactly the same process as your first/previous round on FounderCatalyst, including electronically signing all documents, marking money as received and finally issuing of share certificates.

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