How Scottish businesses can count on investment with the perfect pitch

WITHOUT access to capital, most start-ups and scale-ups will not be able to fund development, their working capital needs and, ultimately, will be unlikely to reach their full potential.  

In order to successfully navigate the funding trail, founders need to be equipped with a working understanding of what a fundraising process will involve. 

Fail to prepare; prepare to fail
YOU need to build confidence with investors, who are buying into you as much as the underlying business. Investors will expect founders to be well prepared and to demonstrate the right mix of optimism and realism about the potential scale of their business opportunity.

Get your paperwork in order
THE first step in any fundraising process is to get your paperwork in order, particularly your financials, business plan, projections, market research and pitch deck. 

Have your pitch in order
YOUR pitch deck should be capable of being left behind with investors and provide the framework for any opportunity to pitch. Founders will, quite possibly, receive a number of rejections. Don’t take it personally – there are a number of reasons why your opportunity may not have been the right fit for that particular investor. 
Rather, if the opportunity is sound, refine your offering and return with greater determination.

Scope the investment
YOU should thoroughly assess your investment proposal. What is it you are offering? How much of it is being offered? What will it cost? Are there any tax advantages in taking it? Founders should be able to answer all of these questions. Taking too little or too much investment can be dangerous, so understanding your funding requirement is key. Arm yourself with an understanding of the likely terms (as well as some of the jargon). 

Valuation
FOUNDERS need to understand the dilution of the investment round. For example, if an  investor places a ‘pre-money’ valuation (the value of the company before the investment) on the company of £4 million, the company has a share capital of one million ordinary shares and the company is offered an investment of £1 million in return for ordinary shares, the dilutive effect of the round is 20%.  However, if the £4 million valuation was a ‘post-money’ valuation (the value of the company following the investment), the dilutive effect would be 25%. A big difference depending on whether the valuation is pre or post money.

Share class
THE two most commonly encountered share classes are ordinary shares (often referred to  as common shares) and preference shares. Preference shares will typically, on a return,  entitle the shareholder to receive the amount they invested in priority to any return on the ordinary shares. It is also common that preference shares can be convertible into ordinary shares at the option of the shareholder (i.e. in circumstances where the return on ordinary shares would exceed that of the preference shares).

Information rights
INVESTORS will request certain information rights from the company, such as monthly management accounts, annual accounts and business plans within agreed timeframes. This information will often be required by an investor (particularly by investment funds) to meet their own reporting requirements. You need to have the structure and processes in place to meet such requirements before entering into an agreement with an investor. 

Appointment rights
SOME investors will seek board appointment rights as part of their investment. This means a representative of the investor will join the company’s board at closing, or the investor will be able to insist on such an appointment at any time post-closing. It is important to ensure such appointment rights do not create an unwieldy board structure, which restricts the agility of the company. 

Reserved matters
BECAUSE investors wish to ensure that value is not lost from the company in which they have invested, they will customarily insist on a set of reserved matters. These seek to protect the value of the business and ensure that, without the consent of a qualified majority of the shareholders (or investors), the company cannot undertake those reserved matters. 

Pre-emption rights
PRE-EMPTION rights give investors (and often shareholders generally) the right to maintain their proportionate ownership of the company through subscribing for their respective proportion of new shares to be issued in subsequent funding rounds. If, following the completion of the pre-emption process, shares remain unallocated/unsubscribed for, the company will usually be free, within an agreed period, to issue unallocated shares to third parties at the price offered under the pre-emption provisions.

Anti-dilution
ANTI-DILUTION provisions seek to protect investors from subsequent down rounds (rounds in which shares are issued at a lower round price than the price paid by the investors) either by issuing additional shares to the investor or, if the investor holds preference shares, often by increasing the number of ordinary shares the preference shares can convert into.

Right of first refusal
A RIGHT of first refusal grants investors (and often shareholders generally) the right to acquire shares being sold by other shareholders before these are sold to third parties. Shareholders must notify their intention to sell their shares and set a price at which the investors (or other shareholders) may acquire these.

Drag rights
AS the number of shareholders of a company increases so too does the risk of being unable to get unanimous agreement to the terms offered by a third party to buy the company and to have a voluntary sale. Founders and investors alike don’t want to find themselves trapped with shares and no ability to exit. Drag rights permit a qualified majority of the shareholders of a company (often referred to as the ‘dragging shareholders’) to force the other shareholders (often referred to as the ‘called shareholders’) to sell their shareholdings on the terms accepted by the qualified majority. 

Tag rights
SUCH rights ensure shareholders can exit on the same terms as the majority. These rights create liquidity for shareholders in circumstances where there is set to be a significant change in ownership (usually where a ‘controlling interest’ is being obtained).

Vesting
SHARE vesting is the process by which founders receive the full rights to their shares or share options over a period of time. A key risk for investors is that the value of their investment will be reduced if a founder leaves. To combat this, investors often ask for the shares of founders to vest over a period of time after the investment has closed. 

Leaver provisions 
THESE ensure that employees, and usually founders, who are no longer engaged in the business, can be forced to sell their shares. The price to be paid for such shares will depend on whether the leaver is a ‘good leaver’ (for example, incapacity) or a ‘bad leaver’ (such as when dismissed for cause). Leaver provisions ensure shares are not held by  passive holders and can be recycled to other employees who are engaged to ensure that they benefit from future growth.

Warranties
AS part of an investment round the company and, frequently, the founders (the warrantors) will be asked to confirm certain statements of fact, referred to as warranties. These are the assumptions on which the investor based their valuation of the company (e.g. that the company is not subject to litigation). 
If the warrantors do not disclose any circumstances in which the warranties are untrue, the investor may raise a claim for breach of warranty and  readjust the value post-closing through a claim for damages.

Exclusivity
INVESTORS do not want to invest time and expense in an opportunity only for the company to ‘shop’ their term sheet and use it to improve terms with another investor. Accordingly, investors will often provide a short window within which the term sheet is “open” for acceptance and also look to agree an exclusivity period (often 30 to 60 days after the term sheet has been signed) within which the company is unable to undertake, or solicit, another  investment opportunity. 

Identify the right investors
WITH an understanding of the investment terms, and your preparation well advanced, the 
last step is to identify the right investors for you. Always view investors like partners. They need to be the right fit for you and your company. Founders should not prioritise valuation at the cost of fit, ethos, familiarity and the added value that a potential investor may bring. 

Shepherd and Wedderburn’s corporate team combines industry knowledge and extensive experience with technical expertise, and is on hand to assist businesses at all stages of their growth journey. 
The team’s Start to Scale initiative, comprising written guides, interviews and in-person events, addresses some of the specific challenges affecting start-ups and scale-ups throughout their lifecycle to give entrepreneurs the insight they need to scale.
Visit shepwedd.com for more information, or contact John Morrison, Partner in Shepherd and Wedderburn’s corporate team, at john.morrison@shepwedd.com 

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This insightful Q&A with Shepherd and Wedderburn Partner Neil Maclean provides succinct answers to the top ten questions the firm is often asked from entrepreneurs who are hiring for the very first time

How do I know if I am employing rather than contracting?
ODDLY, it’s not as straight-forward as it may seem. 
An employee relationship is governed by a contract of employment and has a number of key features including personal service; mutuality of obligations (an obligation by the employer to provide work and an obligation on the employee to undertake work); and, importantly, control (for example, the employer generally dictates how and when the work is carried out). 
The rise of the gig economy has seen an increase in the number of individuals engaged by businesses on more flexible terms, often as self-employed contractors or as casual workers. 

How should I go about recruiting an employee?
THE recruitment process generally involves creating a job description and advertising the role, shortlisting applicants, considering whether aptitude tests would be useful, agreeing the selection criteria and holding interviews. 
At interview, candidates should be marked against the selection criteria, be asked broadly the same questions, and not asked any questions concerning details of their personal life, unless directly relevant to the requirements of the job.  
To do otherwise, opens the company up to potential claims. 
 Hire fast; hire twice… so do take care to ensure that your growth ambitions are not driving hiring decisions. 

What must an employment contract cover?
A COPY of the main terms and conditions of employment must be provided to the employee on or before their start date. 
It is sensible to have this signed and returned. 
A statement of particulars (which generally forms part of the employment contract) must, by law, contain a number of matters including amongst other items: the date the employment started;  whether there will be a probationary period and, if so, its duration; the job title and job description; the place of work; the salary and how often it will be paid; the pension arrangements; the hours and days of work and whether these are variable; holiday entitlement; termination and notice periods; details of any training or other benefits; and disciplinary/grievance procedures. 

Do I need to obtain employers’ liability insurance?
EMPLOYERS are required by law to have employers’ liability insurance  to compensate an employee who is injured at work. 
Cover must be for at least £5 million and come from an authorised insurer. In addition, the insurance certificate must be displayed in the workplace.

What do I need to know about payroll?
YOU will need to register as an employer with HMRC. Through PAYE online, you can send payroll reports to HMRC, access tax codes and notices about employees, and receive alerts from HMRC if you are late in reporting or paying an employee.  

Will my business need to offer an employee pension scheme?
NEARLY all employees need to be automatically enrolled into a pension scheme, with contributions paid by both the employer and the employee. Group schemes are available such as NEST, the government’s workplace pension scheme. 

What should I do on an employee’s first day?
PRIOR to the employee starting work, you need to verify the employee has the legal right to work in the UK. 
You do this by conducting a “Right to Work check”. You need to date and keep copies of the identity documents checked. Additionally, for tax compliance, you need to obtain the employee’s P45. 
You should also take details of the employee’s next of kin to be contacted in case of emergency and make sure they have returned a signed copy of the statement of employment particulars. 

What health and safety duties do I need to comply with?
THERE are a range of common law and statutory health and safety duties under the 
Health and Safety at Work Act 1974 and the related regulations and codes of practice that employers must comply with. 
Generally, employers are required to provide and maintain a safe place of work, a safe way of working and safe plant and machinery, with employers also being subject to liability for any negligent acts carried out by employees during their course of employment.  

Will data protection legislation apply to me as an employer?
EMPLOYERS and employees both have obligations relating to data protection, and under GDPR there are substantial fines for a failure to comply. 
Employers have to provide employees with information about how their data will be processed, including for how long it will be retained, and this will often be set out in a Privacy Notice. 

What do I need to know about immigration?
ONLY British and Irish citizens have an automatic right to work in the UK.  If you are employing someone who is not British or Irish, check if they already have a visa which provides an unrestricted right to work, for example a spouse visa or EU Settled Status. 
If they don’t have their own visa, you may be able to sponsor them under a skilled worker visa or a scale-up visa. The skilled worker visa is the standard UK work permit and the scale-up is a brand new route designed for fast growing UK businesses. 

Visit shepwedd.com/start-to-scale for more information, or contact Neil Maclean, Partner in Shepherd and Wedderburn’s employment team, at 
neil.maclean@shepwedd.com

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How to partner with investors for growth

Q&A with Harry Staples: Investment Manager, Maven Capital Partners

What do investors look for when considering investing in scale ups?
EVERY investor has their own set of criteria which they apply when reviewing investment opportunities, there is no one-size fits all approach. However, there are certain factors almost all investors will consider:

Management team
THE people behind a scale up business are hugely important, and a strong management team is a key criteria for any investor. Investors want to support teams that are credible, passionate and that they can build a relationship with.

Finances and business plan
YOUR business plan and projections should be ambitious and demonstrate how your business will grow but should be based on assumptions that you can support. Investors will be put off by a vague business plan with assumptions that aren’t realistic.

Market
INVESTORS prefer businesses that operate in markets with significant growth opportunities. It is 
important for your product or service to fit well within the relevant market to ensure that it is competitive, can scale and solves a real problem.

What is your top tip for founders embarking on the investment trail?
THE earlier you can start preparing for a fundraise the better, the process usually takes longer than expected! It is also important to be aware of your cash runway to prevent placing yourself and the business under unnecessary pressure. Engaging with a business advisor may seem like an unnecessary cost but they can help save you time and money and minimise distractions from running your company day-to-day.

How to choose the right funding partner for your business?
CHOOSING an investor is about more than just the money or getting the highest valuation. Receiving investment is like entering into a partnership, you need to be able to work together as it is likely that any investor will be involved with your business for an extended period. An investor needs to be the right fit for the company and both parties need to have a shared vision for driving the business forward and maximising value.

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Go the distance with employees

Q&A with Robert Gelb, Founder, Alloy.vc, GP at MoreThan Ventures, serial founder, startup advisor, podcast host. Previously led Kindaba and HeySummit

How do you choose the right remote workers to join the team?
REMOTE work suits people who are confident in how they work best, are very clear in communication and see value in providing feedback early and often. 
It can be a lonely existence, so testing for an awareness of how they see the relationship with their colleagues, with work and also socially goes a long way to making sure you’re bringing someone on who understands not just the benefits, but the challenges of remote work.

How can you have confidence in a remote team getting the work done?
FUNDAMENTALLY it’s about trust and often I find people who ask this question mask the remote aspect for a lack of trust. 
Just because someone comes into an office doesn’t mean they’re getting their work done. 
A manager should have an understanding of what done looks like and be able to tell if someone is performing or not based on the work itself, not where someone 
did it.

What can be put in place to give remote teams the best chance at success?
THINKING through processes and rituals is important to make any business productive, but remote especially so. 
If one member of a meeting is remote, everyone should be ‘remote’, i.e everyone should be on separate connections during zoom calls, even if they’re in the same room. 
Decision-making should have clear processes – for us, ‘if it wasn’t on Slack, it didn’t happen’ to encourage everyone to write up decisions, even if they were made in person.

Have you found any particular advantages working with a remote team over more traditional in-office teams?
THE flexibility is extremely beneficial and often leads to more happy team members. 
Expanding our talent pool to be highly specific to global timezone-ranges rather than local lets us hire faster, reduce office cost and also do much better asynchronous work.