Lifecycle of a tech startup series: Seed raise

3 November 2021

Having decided in episode 4 of our lifecycle of a tech startup series on targeting angel investors to raise £500,000 investment in the business, the founders of KNow Wear Limited researched various angel investor networks which aimed to connect startups like yours with angel investors. You applied to pitch at a couple of events and were invited by one network to interview with them in person. The network was very impressed with the business and invited you to pitch at their next event.  

In preparation for fundraising, you had already prepared a pitch deck and in the weeks ahead of the pitch event, spent some time fine-tuning the pitch.

On pitch day, you presented the investment opportunity well and received positive feedback with several investors reaching out to find out more about the business after the event. Over the next few weeks, you spoke with the interested investors from the event and received soft commitments from various angels of £200,000 in total.

During this time, you were also introduced to a friend of Chris’ father, Roy, a serial entrepreneur with a keen interest in tech products. After meeting with Roy to discuss the business and the product you are developing, Roy was keen to back the company and agreed to invest £300,000.

With soft commitments for the full £500,000, the company instructed lawyers to prepare the investment documents.

Term Sheet

Your lawyers have advised you to first agree a term sheet with the investors. A term sheet is a document which generally sets out the key commercial and legal terms of the proposed transaction. Your lawyers prepared the first draft of the term sheet and talked you through the key elements. Once you were happy with the draft, you sent it to the investors.

Upon reviewing the term sheet a few of the investors asked for additional information rights, namely monthly management accounts, in order to better monitor their investment. Without an express contractual right to such information, a shareholder’s information rights will be limited to their statutory rights e.g. the right to a copy of the company’s annual accounts. The company does not currently produce monthly management accounts and thought this would be too onerous. You suggested to the investors half-yearly accounts and eventually agreed to produce quarterly management accounts.

You also received a request from Roy to have a seat on the board as he would be committing a large amount of money and wanted to ensure that his interests would be adequately represented. Roy is a serial-entrepreneur and as it was the first time you, Sarah and Chris have ever run a business, having Roy on board as a director of the company could be useful in helping you steer the company in the right direction. You agreed to give Roy a seat on the board.

The term sheet was finalised and then signed by the company and the investors. The investors were then given access to the data room which you had previously put together so that they could carry out some more detailed due diligence on the company.

The company’s accountant, having checked that the investment into KNow Wear Limited would be eligible for SEIS and EIS reliefs, applied to HMRC for advance assurance that the investment would meet the conditions for these schemes.

Whilst the investors carried out their due diligence in the company, you instructed your lawyers to prepare the draft investment agreement and the new articles of association for the company, based on what has been agreed in the term sheet.


Investment Agreement and Articles of Association

The investment agreement governs the relationship between a company’s shareholders and is supplementary to the articles of association however unlike the articles it does not need to be filed at Companies House. The investment agreement will include terms such as the information rights, director appointment rights and consent matters.

The articles of association govern the internal affairs of a company and set out the basic administrative and management structure of the company. The articles of association create a contract between each shareholder of the company, and the company itself. Unless bespoke articles are prepared, a company will be incorporated with the statutory default “Model Articles”. KNow Wear Limited was incorporated with the Model Articles so these will need to be updated to reflect what was agreed in the term sheet including pre-emption right on share transfers, permitted transfer provisions and the drag along and tag along mechanisms.

Once drafted by the company’s lawyers there was some negotiation of the investment agreement and articles of association with the investors.

In particular, as the founders are key to the success of the business, the investors have requested that the articles of association include leaver provisions so that you would be required to offer up your shares in the company for sale if you cease to work in the business. You do not have any intention of leaving the business but given the amount of time and commitment you are giving to the business you do not want to lose your shares if you cease to be an employee. Having received advice from the company’s lawyers on these provisions, you agreed to include leaver provisions but proposed that they will only apply to half of your shares and they will reverse vest over three years so the number of shares which the leaver provisions apply to will reduce over time. The investors agreed to this approach as it means that the founders are tied into the business for at least the next three years.  

Whilst the documents were being negotiated, the investors had continued with their due diligence and had found everything to be in order. Once agreed the final version of the investment agreement was then sent out to the investors and founders to sign.


Issuing New Shares

As the investors will be looking to benefit from the SEIS and EIS tax reliefs, the timing of when the funds are received and when the shares are issued is key; as the SEIS shares have to be issued before the EIS shares. Working with your accountant and lawyers, you determine which investors will benefit from SEIS, which will benefit from EIS and when these investors’ funds are to be received and their shares to be issued.

Your lawyers also helped you to prepare the necessary board minutes and resolutions to:

  • approve the company entering into the investment agreement;
  • adopt the amended articles;
  • subdivide the existing 3 shares of £1 each to 30,000 shares of £0.0001 each (as discussed in episode 4);
  • issue new shares to the investors; and
  • appoint Roy to the board.

Once the necessary meetings have taken place and resolutions passed, your lawyers made the relevant filings at Companies House.


Having had received advance assurance shortly after the term sheet was signed, you also instruct the company’s accountant to submit the SEIS and EIS compliance statement forms and issue the SEIS and EIS certificates to the investors who will need these in order to claim tax relief. 

Having completed the raise, you, Sarah and Chris have decided that you will need more help in developing and marketing the product.  Look out for our next episode of the lifecycle of a startup series where we will discuss in more detail what to think about when taking on employees.

About the author

Mei Chung joined the Corporate Commercial team in August 2021. She advises entrepreneurs, investors, startups and established businesses across a variety of sectors on a broad range of corporate and commercial matters.


Lifecycle of a tech startup series

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