How to close your funding round before the end of 2020

We’re very excited to announce the first edition in our series of guest articles from our partners SeedLegals. SeedLegals automates the legals to help companies close funding rounds faster, and hire, manage and allocate equity to their team.

CCO Adam Blair explains legal considerations to help you close your fundraise before 2020 is out:

And just like that, it’s almost the end of 2020! We hope you’ve had a successful year up until this point, considering the year it’s been…

At SeedLegals, many founders we speak to are now thinking about how to scale their business in 2021, and beyond. And what’s the best way to scale? Securing funds so your business can grow. 

With the end of the year fast approaching, you’ll want to be getting everything sorted before the Christmas break, so here’s what you need to know… 

Seasonality in UK fundraising

At SeedLegals, we’ve observed three main spikes in the fundraising calendar:

  1. The first, perhaps unsurprisingly, is the end of the tax year (April 5th), and particularly for SEIS and EIS rounds. The reason for this is investors are keen to get deals closed to ensure that they receive maximum tax relief in the current tax year.
  1. The following is the run-up to the summer holiday season. Traditionally (at least prior to Covid-19), many investors use August to pack up and take some time off. If a deal isn’t done by the end of July it won’t be closed until September (or even later), hence the pre-holiday rush. 
  1. And lastly, the run up to Christmas. This can be a frantic time of year for both investors and founders, with lots of fundraising activity and investment. There’s nothing quite like getting a deal closed and all the paperwork done before the festive break! 

This is great news for founders, particularly this year as a result of the pandemic. Deal volumes were lower than usual earlier in the year, and we are now seeing a significant uptick in activity from investors to make up for this. 

SEIS/EIS

Over 30,000 UK companies have now received investment over £20 billion since the introduction of the EIS Scheme in 1993 (HMRC). In the 18/19 tax year alone, funding via the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) totalled over £1.8bn. 

The SEIS/EIS schemes allow investors to claim tax relief on the money they are investing into your company. Investors are able to claim Income Tax relief at 50% for SEIS investments, up to £100,000 each tax year, and 30% for EIS (max £1m). 

It’s worth noting that SEIS/EIS allowance can be claimed for both this tax year OR the prior tax year (known as carry-back). If, for example, your investor invested £50,000 SEIS/EIS in this tax year (2020-21 tax year), they can claim income tax relief against their tax payable for this tax year OR they can carry back to the previous tax year (2019-20).

SEIS/EIS Advance Assurance 

As a founder, the first step when fundraising is typically to apply for SEIS/EIS Advance Assurance. Many investors will only consider investing in a company that’s received SEIS/EIS Advance Assurance, as this gives them confirmation that they will receive tax relief on any potential investment. 

To get approval for your company, you’ll need to line up one or two initial investors to add to your application to demonstrate interest, and then you can apply. 

If you’d like to find out more about SEIS/EIS, you can read more here.

The importance of the Term Sheet

Once you have investors interested and committed to investing in your business – you’ll need to send them a summary of investment terms – called a Term Sheet. 

Term Sheets are where a large amount of negotiation can happen as they include details on the valuation, but also things like vesting schedules, reporting requirements and even founder salaries. 

What we often see at SeedLegals is once a founder has the first signature on the Term Sheet, it’s generally easier to get subsequent investors on board and close the round. 

SeedLegals data shows that on average companies close their funding round approximately 30 days after unlocking their term sheet. 

Advanced Subscription Agreement

An Advanced Subscription Agreement can be issued to new investors at any time and allows investors to subscribe for shares in an upcoming funding round, in exchange for giving you money now. 

In these cases, no valuation is set. Instead, your investors will receive their shares (generally at a discount) when you close your next funding round. 

An Advanced Subscription Agreement is a carefully worded, easy to understand document which complies with SEIS and EIS legislation – read all about it here.

Instant Investment

Instant Investment allows you to close a small (or smaller) funding round, raising only what you need or just the investment you’re able to get right now, and then top that up anytime, within limits agreed in the initial funding round.

Let’s say you want to raise £500K but you only have £300K of investors lined up. Rather than spending weeks or months finding the remaining £200K, you can close the round now, but set the deal terms to allow you to top up another £200K anytime within the next 12 months (for example), at the same or higher valuation, with no further investor consents needed.

This enables you to close the commitments that you have now, with the flexibility to continue raising in the new year, or maybe even during the next peak in the fundraising calendar…

So, there are a number of strategies that can be used to allow you to take in investment before the end of the year. Which are you going to choose?

About SeedLegals

We’re the operating system for your company, and we’ve already transformed the way more than 15,000 UK and French startups run their businesses.

Want to find out more? Head to SeedLegals or book a call with one of the SeedLegals experts, who will be happy to walk you through the best option for you.

Digital Addressing startup OKHi raises £1.4M with support from AIN

OkHi, a Kenyan/UK startup addressing system for emerging markets, has raised more than £1.4M, supported by Angel Investment Network, the world’s largest online angel investment platform. 

Headquartered in Nairobi and registered in London, OkHi is solving a problem that affects 4 billion people and costs businesses billions every year. The company was co-founded in 2014 by Timbo Drayson, who was at Google for 7 years, where he led the launch of Google Maps across emerging markets and built Chromecast. OkHi’s pioneering technology enables any business to collect an accurate address from their customer, verify it and navigate to it without getting lost. Its primary focus is to solve address verification for financial services, an endemic problem that holds back financial inclusion across emerging markets.  

The story has been getting widespread media coverage in the tech media press in the UK including titles like UKTN, Techround, UK Tech Investment News and Growth Business. It has also been picked up in African media including Disrupt Africa, Tech In Africa and VentureBurn.

Backed by the co-founder of Airbnb Nate Blecharczyk and chairman of Twitter Patrick Pichette, OkHi has powered millions of uses of its addressing system. The company recently launched in Nigeria with Africa’s largest banking platform, Interswitch Group, to solve address verification in Nigeria and beyond. The round took only two months to complete. OKHi is now deploying this investment to double the team’s size, win the  Nigeria market and grow the business beyond Africa. With scalable products solving a global problem, OKHi is on a clear trajectory to Series A.  

According to Timbo Drayson, “A physical address should be a human right. Whether it’s opening up a bank account or getting an ambulance to your door, every person on this planet deserves access to these services. This raise is a vital stepping stone to unlock our growth into Nigeria as well as explore new markets across Africa, Middle East and Asia. The Angel Investment Network was instrumental in our fundraising success and has really helped us on our Mission to enable half the world without a physical address to “be included.” 

According to Ed Stephens, who led the raise for Angel Investment Network: “This start up really ticked so many boxes for our investors who really bought into the company’s vital Mission. We were inundated with interest with more than 180 inquiries on the table. OKHi’s digital infrastructure helps to answer a genuine need for people without a formal address to get access to services that can help transform their lives. The team’s credentials were impeccable in their experience as entrepreneurs and addressing so we look forward to seeing the huge success of this company as it grows to help millions of people across the globe get better access to services.” 

7 things to consider when investing in your next software startup

By Roger Planes, CEO Silicon Rhino (roger@siliconrhino.io)

Investing in tech startups can be daunting, especially if you don’t have a tech background. Investing in new ideas, market opportunities and teams can be exciting, and should remain the most important deciding factors when considering an investment. Here are a few points to focus on from a software due diligence perspective.

Documentation

Documentation is hardly at the top of the priority list of many early stage companies. While the tech team may know all the ins and outs of the project by memory, it will be much harder to onboard new developers or take over the tech if the need arises.  Projects and quirks in the systems should be well documented.

At the very least, any startup should have a set of documentation to allow someone else to pick up the project if the key people became incapacitated.

Roadmap

Early stage startups usually fall into the trap of prioritising features due to customer feedback or potential deals in the pipeline. Ask for a 12 month roadmap to understand how the product will evolve going forward. 

Having a roadmap in place will serve as a general direction, but understand tech startups operate in an agile environment so feature prioritization may change to best achieve market fit.

Resourcing

The convention of a tech startup needs to have a tech team is being challenged. So long as there’s access to reliable resources to build the product, a product can easily go to market whether the team is in-house or not. What matters is how well the company is able to explain the relationship and access of the resource and how these resources are prioritised.


Leveraging third party systems

Early stage startups should focus in building and iterating the core of their product first and foremost. When resources are not widely available the team needs to prioritise what should be built by the company itself versus what third party tools can be integrated into the system. Payment processors like Stripe or Braintree are one the best examples for a product that takes payments but isn’t part of the core offering. Make sure the team is focused sharp in the product USP and integrate other tools to help speed up development.

Customer Data

Another advantage of using third party software is delegating the regulatory requirements and storage of sensitive customer data like credit card and payments. While you shouldn’t expect developers to be experts in data security, the team should be aware of the current laws, their obligations and have plans to improve security in the product roadmap if it’s not as robust as it could be.

Architecture

There are infinite ways to architect a technical product, and all of them have their pros and cons depending on budget, resources available and product availability. 

The most important pitfall to look for is the opportunity for a single point of failure. An example of this would be having your whole test stack plus storage in a single server or virtual machine. In case of failure or unavailability (it happens) this would mean the company and their customers wouldn’t access any data while the incident lasts. Distributing the technical stack between different services or microservices will lessen the risk in case of disaster.

Disaster Recovery

Technology can sometimes be unpredictable, so every tech team should have at least a disaster recovery plan in case there are problems with the hosting of the platform or some external services. Asking about backup location and periodicity, how long would it take to relaunch the tech stack in case of failure will give you an understanding about how much the team is thinking about disaster recovery.

This is by no means meant to be an exhaustive list but should highlight the common areas you should have a high level view over for potential additions to your portfolio (and potentially reviewing these points on your existing investments). All these areas can be relatively easily overcome in the early stages of a company. If these questions throw up something unexpected that gives concern, please speak to a trusted advisor. 

Next Steps

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