Investing in Startups

Investing in startups and scale-ups can be exciting and rewarding. Whether you are a new angel investor or a seasoned investor, our specialist team of investment lawyers can help you to navigate the investment process from agreeing heads of terms, through to completion.
 

We specialise in advising on investments in early stage and high growth companies and regularly assist angel investors, family offices and venture capital firms on seed funding rounds and Series A/Series B funding rounds. We are pragmatic, act quickly and we are well used to solving (and not creating) problems. As well as advising on investments, we can also help with wider wealth planning and investment structuring. 

Startup investment experts

We understand that you will need flexible and practical advice and we won't baffle you with jargon. Instead, we will work with you to complete each investment and wherever possible will charge you a fixed price so you know exactly where you stand.

You will be given our commercial view on the proposed investment terms and we will do all we can to ensure that your needs are considered and your position is protected.

We will then work with you through your investment journey. Click here to get in touch with our Startup Investments team.

FAQs relating to startup investments
 

What is the legal process to be followed before completing an investment?

Before making an investment into a startup, an investor should carry out commercial, financial and legal due diligence on the startup. ‘Due diligence’ is just an investigation of the assets and records of the startup to try and establish whether these support the value the startup has placed on its shares. From a legal perspective, an investor should seek to answer questions like: has the startup raised funds before? If so, on what terms? Does the company have any debt? Has the startup issued options or convertible loan notes? Does the startup own the tech it has developed? An investor should also seek to understand the market the startup operates in, its competitors, its target customer base and its finances and forecasts.

Due diligence can be carried out individually or in a syndicate of angel investors, in which investors share their respective findings. Investors should also meet with the founders of the startup, as the team is key in an early stage investment. Can the founding team deliver their vision? Are they qualified to do so? Are they willing to answer questions that have arisen as a result of the due diligence?

Once an investor has decided to proceed in principle with an investment, we would expect him to be sent a termsheet setting out the key terms of the investment. This then needs to be discussed, negotiated and agreed.

Lawyers will then draft an investment agreement and new articles of association based on the agreed termsheet. These are the legally binding documents under which an investor makes an investment into a startup.

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What are the different investment options available?

There are different options in terms of how money is invested in a startup. These include:

• Subscription for shares (otherwise known as “share capital” or “equity”)
• Convertible loan note
• Advance subscription agreement

Subscription for shares

A subscription for shares involves cash being injected into the startup in exchange for the immediate issue of shares in the company to the investor.  The percentage of the shareholding/equity an investor will have on completion of the investment will be determined by a valuation of the startup at the relevant time. 

Convertible loan note

On entry into a convertible loan note, monies are lent to the company in the usual way. However, on maturity of the loan, there will be the option to convert the outstanding balance into equity in the startup, instead of the loan being repaid. On a conversion such shares will often be issued at a discounted subscription price to take account of the fact the holder of the convertible loan note took a bigger risk by investing in the very early stages. 

Further information on convertible loan notes can be found in our blog 'Convertible loan notes - top tips for founders of startups.'

Advance subscription agreement

One of the issues investors face when investing via a convertible loan note is that they cannot take advantage of SEIS or EIS relief (which may be available to an investor subscribing for shares).  The use of an advance subscription agreement addresses this issue but still has the advantage for the startup of receiving a quick injection of cash.

If structured correctly, an advance subscription agreement enables the investor to subscribe for shares and pay for them at the date of the agreement but with the funds converting to shares at a discounted subscription price upon a future event (e.g. the next investment round). 

Investors should be aware that usually, once the advance subscription agreement has been entered into, they have no right to demand their money back and the investment will automatically convert to share capital at some point.  If another equity raise or exit does not occur then the investment will convert into share capital on a specified date or on insolvency of the company. 

Further information can be found in our blog 'What is an Advanced Subscription Agreement?'.

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What protections should I be looking for as an angel investor?

As an angel investor you should ensure that your information rights are set out in detail in the investment documentation. What information do you need to see to effectively monitor your investment? How often do you need to see it? Who will send this to you?

You should also ensure that you have a first right of refusal or ‘pre-emption right’ on any future issue of shares. This will give you the option of following on in additional fundraises and prevent you from being diluted. You also want to ensure that you are being issued with voting shares and, if the company has more than one class of share, that you understand what rights are attached to each. Does anyone rank before you?

You should also ensure that the founders are prevented from competing with the business of the company and from soliciting clients and key employees of the company, while they are employed and for a period thereafter.

Again, this is not an exhaustive list but is a good starting point.

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What is the purpose of a termsheet, and what should it include?

A termsheet sets out the legal and commercial terms of a transaction, such as the key terms of a share sale, an investment or a loan.

Termsheets are not normally legally binding, other than in respect of confidentiality, exclusivity (if applicable) and jurisdiction. A termsheet in respect of an investment into a startup should include details of the company, the current shareholders and the current directors; the valuation of the company and the amount the company hopes to raise; the information rights the investors will have post investment; whether investors will have ‘reserved rights’ in respect of certain major decisions of the company; details of what the funds will be used for; whether investors will have a first right of refusal on the issue of new shares or the transfer of existing shares; whether the new articles of the company will include drag or tag along rights, etc.

Termsheets are useful because they focus the mind, encourage the negotiation of key commercial terms and make evident whether there is an agreement in principle or not. They are also used by lawyers as the basis for drafting the more involved legal agreements that will need to be entered into to complete the transaction in question.  

See more about termsheets in our blog 'What is a termsheet and why is it important?'

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Examples of recent work

• Acting for an angel investor on a £100,000 investment into a satellite communications services startup
• Acting for an investor on a £100,000 investment into a pub group
• Advising Hambleden Capital LLP on its co-investment into Titan Wealth Holdings Ltd to fund its proposed acquisitions of Tavistock Wealth Ltd and Global Prime Partners Ltd
• Advising a family investment company on its £3.5m co-investment into a new wealth and asset management group to fund its various acquisitions
• Advising a retail investor on a £7.5m investment into a wearable technology business
• Advising an AI startup on the exit of 2 shareholders and a follow-on raise via convertible loan notes
• Advising an online marketplace on a bridging round
• Advising a tech startup on a follow-on equity round
• Advising a vegan foods startup on an £800k follow-on investment from a VC
• Advising a venture capital company on a £1m investment into a deep-tech startup
• Advising a venture capital company on an investment into a software startup
• Advising a startup in the wellbeing space on a strategic partnership
• Advising an e-commerce startup on its equity seed round