RAISING FINANCE. Key Contracts. Commercial Contracts. Contractual JV. Collaboration. Design. Protecting IP. Key IP Rights. Development & Production

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1 RAISING FINANCE Key Terms of Occupation Lease Key Protections Rent & Other Charges Joint Ventures JV Commercial CC Business Premises BP Corporate JV Contractual JV Employees E Managing Risk Accounting AA & Assurance Raising Intellectual Property Key Rights Development & Production D Protection Handbook EMI Tax Optional Policies S T Share Unapproved Share SO Exit Planning Employment Taxes Acquisitions Funding VAT Corporation Tax PF Out of Court Settlement Dispute Resolution DR Tax Reliefs Strategic Plan Directors Company CF Formation Articles of Association Shareholders Agreement SCINAPSE

2 Joint Ventu RAISING FINANCE You have your idea, your business plan and an office to work from but in order to get your business off the ground you need money. Managing Risk Raising In the early stages of a business lifecycle costs will be incurred before you can start to generate sales, putting a strain on working capital i.e. cash. Whilst you may not have large capital expenditure on machinery or stocks, you need to pay the bills, undertake research and pay your staff. Getting the right finance at the right time will help your business to reach its potential. There are two different types of finance available to businesses: such as a bank loan a purchase of shares in the company DEBT FINANCE finance is typically a loan that must be repaid and incurs a regular cost, usually in the form of interest. A lender will not be a shareholder of the company, however they will be a stakeholder and will have a certain amount of influence over the business, which can be through contractually binding or more informal means. The lender will typically assign a Accounting the loan, which is a common practice AA dedicated contact to the business who will & Assurance when it comes to start-up businesses. seek to work with you to ensure their money is protected. Contractual terms, known as There are additional forms of debt financing covenants, include items such as notification available depending on the nature of of the lender under certain circumstances Exit Planning your business, such as trade or asset or changes to the loan terms in the event backed finance or invoice discounting. If of specific criteria being breached. circumstances permit, you can also lend to Acquisitions your business in the form of a director loan. The most common forms of debt financing are: Term loan: fixed amount and fixed period, repaid in instalments with interest and arrangement costs. Overdraft: fixed limit but with flexibility to borrow as much or as little as needed within that limit. Typically not set for a fixed period, this is also known as a revolving facility and usually incurs interest. Loan notes (or debentures): bespoke agreement based on a contract whereby money is lent to the company on any terms the two parties are willing to agree to. The most common arrangement is for the principal sum to be repaid at the end of the specified period, with interest accruing over the same period. Loan notes themselves may be sold so your stakeholders can change over the life of COSTS & PF CONSIDERATIONS OF DEBT Strategic Plan The cost of debt will depend on a mix of the position of your business and type of debt being provided. As a rule, lenders will typically levy higher costs on businesses Company Formation that they deem more risky (although it should be noted that each lender will have its own individual risk profile and appetite). Factors that will affect the perception of risk that your business possesses will include historic performance (for example, against budgets), visibility of future revenue, and many other things. The structure of the loan/facility can be crafted to compensate the lender for perceived risks. Some debt finance may also be convertible to equity under certain conditions. CF

3 Key SECURITY Terms of Occupation JUNIOR VS Lease SENIOR DEBT You may be asked by the lender to Key Protections provide some form of security against Rent & Other Charges It may be the case that your business the loan. This is known as a secured takes debt funding from two separate JV loan. Security can be in the form of res parties, or Business that a single lender is almost any Commercial asset of the business, as BP CC providing Premises two or more tranches of long as the lender believes it has value, funding, each with different terms. and can include tangible assets such Corporate JV The different funders or tranches will as equipment or properties, or even be given different levels of seniority intangible assets such as intellectual Contractual JV relating to the order of repayment in Employees E property. This security allows the lender the event of insolvency. The most senior to bear the risk of making the loan debt will be first to be repaid, followed because if your business is unable to Optional Policies by the next senior and so on. Junior repay the loan, the lender will assume D debt is the most risky, and accordingly ownership of the asset. The value placed Handbook Share bears a higher rate of interest. SO upon the asset will differ between the Key lender Rights and the business, for example, a As with any important decision about Unapproved key piece of patented technology Development may Share your business, it is important to give be the most vital asset & in Production your business, serious consideration to debt financing but to a lender this will represent and in particular the terms EMI surrounding something that is hard to monetise. S any agreement. Identify any onerous Intellectual Protectionterms and ensure you know what you Property An unsecured loan, where no security is are signing up to, and most importantly, given to the lender, is inherently more ensure that your business is able to meet risky and therefore the lender will expect the interest and principal Tax repayments. T higher interest payments or charges You should make sure you understand in order to justify taking this risk, or any covenants contained in the contract, the amount prepared to be lent will be and that you are clear what you can and Employment Taxes reduced. It can be difficult for businesses cannot do without the lender s consent. without a large fixed asset base to secure VAT favourable terms from Funding a lender as there is limited security that can be given. Corporation Tax Out of Court SHAREHOLDER Settlement GUARANTEES Dispute Resolution DR Tax Reliefs Directors An alternative to the security mentioned above, which can prove useful in early stage businesses Shareholders with limited assets Agreement to offer as collateral, is a shareholder Articles of Association guarantee. The shareholders of the business will be required in this situation to guarantee the debts of the business with their personal assets by offering them as security (typically your home). Personal guarantees come with a significant degree of risk and you should seek expert advice before proceeding with such an arrangement. Raising

4 Raising EQUITY FINANCE finance is essentially a purchase of part of the share capital of the business where the investor becomes an additional shareholder, sharing in the risks and returns of the business (upside and downside). Typically, equity investments are not repaid, with the investor making their return through the receipt of dividends and a share of the proceeds when the business is sold. Dividends are paid to shareholders from the profits of the business. There are different classes and types of shares that an equity investor can receive, including redeemable shares and preference shares (which give the holder a fixed dividend but have no voting rights) amongst others. If the shares held by an equity investor confer voting rights, they will be given the ability to make decisions on the business, although their influence will be dependent on the number of shares they hold. From the investor s point of view, the risks are higher than with debt finance as they are unlikely to receive any money back in the event of insolvency, however the potential rewards in the event of a successful sale can be significant. investors can be almost anyone who has the money and the risk appetite to invest, including management, your friends and family, business angels/high net worth individuals, and private equity funds. During the early stages of getting your business off the ground, the most likely equity investors will be friends and family, however as the business starts to grow and the financing requirement grows with it, the likes of private equity will become a more realistic source of equity investment. Private equity (PE) invest through specific funds for which they are looking to generate a return. They typically invest over a period of three to seven years, at which point they will seek an exit, either through flotation of the business on the capital markets, or through the sale of the shares to a third party (such as another PE house or a trade purchaser). PE are sophisticated, WARRANTIES professional investors who will require more Management, shareholders or both will protection and more complex contractual be required to give warranties to investors arrangements compared with friendly Managing regarding Riskthe assets and liabilities of the investors such as friends or family. business. This can present a risk to the shareholders down the line and requires When obtaining equity finance, there are careful consideration to ensure they are numerous considerations to think about: Accounting fair and reasonable to AA both parties, and & the Assurance potential liability on management/ VALUE shareholders is appropriately limited. Selling shares requires a valuation of the business to identify the value of each RESTRICTIVE COVENANTS share. It is difficult to value a business Investors will want to protect their as there are many subjective elements investment and will seek to restrict involved and it is ultimately a compromise the Exit ability Planning of management setting between the existing shareholders up a competing business using and the investor. This is particularly similar intellectual property, or difficult in early stage companies which poaching key staff or customers. may not have a visible track record of Acquisitions profitability or dividend payments. SHARE TRANSFERS BOARD INFLUENCE Investors will have a degree of control on the board so it is important that you are able to work with them and that you can see the value they will bring to the decision making process. STRUCTURE Investors will expect between a 20-50% (unless they are investing via crowdfunding when shareholding expectations are typically a lot lower) share of the business (with some PE expecting a majority), so it is important to get the structure of the shareholding right to protect your interests in the business. Consideration should be given to who has voting rights and which shareholders are required to agree in order to pass or block decisions. Some investors may expect to have the right to veto major decisions. DIVIDENDS The type of shares held will determine the right to dividends of the individual shareholders, and will influence the expectation of dividend payments to investors. It should be noted that if you also have debt finance in the business, the lender may impose restrictions on the payments of dividends whilst the debt is still outstanding. Existing shareholders will usually have first refusal if the company issues new PF shares or if one shareholder wants to sell their shares, and you would expect to agree detailed provisions regarding the transfer of shares. It is also usual to agree drag-along and tag-along Strategic rights Plan which, respectively, allow the majority shareholder to force the minority shareholders into a sale and for a minority shareholder to block a sale unless their shares are also purchased. Such provisions will be incorporated into the company s articles of association and/or a shareholders agreement. Any institutional investor putting equity finance into the company will expect to see an up to date business plan in addition to detailed financial projections which they will examine as part of the process. It is vital you get your house in order before approaching these types of investors. You should also consider whether your company is, or can become, one that qualifies for certain key tax reliefs which potential investors may wish to obtain, including Enterprise Investment Scheme (EIS) relief, Seed Enterprise Investment Scheme (SEIS) relief and the various reliefs available in relation to Venture Capital Trusts (VCTs). Deb Co Fo

5 D Opt Handbook t Key Rights Development & Production EMI Intellectual Property Protection Tax mpany rmation CF SEEKING EQUITY Any approach you make to a potential Funding investor will need to comply with the Financial Services and Markets Act 2000 (and related legislation), which covers financial promotions and the requirement for these promotions to be made by an FCA approved person or be Out covered of Court by an exemption. Dispute Approaches to banks and private equity Settlement are generally exempt Resolution as they DR are authorised persons, whilst communications to business angels are often able to benefit from certain exemptions for sophisticated investors or high net worth individuals. Directors The regulations surrounding approaches cover all aspects and can affect something as simple as a business plan. It is strongly advised that you seek legal Shareholders advice, and potentially corporate finance advice, prior to making Agreement any approaches to potential investors Articles to ensure of you are in compliance with the law. Association

6 Joint Ventures JV ATTRACTING FUNDING Corp Regardless of the type of finance you are seeking, a detailed business plan outlining the future of your business, along with robust and defendable financial projections, will be required. Funders or investors need to see your vision of the business to understand where their money will be used. This is your chance to really sell your business as a viable business with a bright future. Raising Con Colla GRANT FUNDING Grant funding can be a useful source of finance for early stage businesses, particularly when working on specific projects or development programmes. There are a number of grant funding options available, including the European Union, Local Authorities and the Welsh Government, where Life Sciences is one of the key priority sectors. Uses of grant funding can include capital investment, research and development, training and job creation (and safeguarding). As with debt and equity funding, a robust business plan and financial projections will be required in order to be successful in obtaining grant funding, and will be subject to certain State Aid and other rules. To give yourself the best chance of receiving grant funding, you need to have a clear idea of which grant will best meet the needs of your specified project. Whilst it is possible to get a loan from the Government, grants are typically non-repayable. Managing Risk Accounting & Assurance Exit Planning AA Acquisitions PF Intell Prop Strategic Plan

7 Directors Key Terms of Occupation Lease Key Protections Rent & Other Charges CHECKLIST Commercial CC Business Premises BP orate JV tractual JV boration Key Rights ectual erty - Do you need to raise finance? If the answer is yes, be clear on why and what it will be used for. Employees E Work out what is the most appropriate source of finance, given your objectives. Optional Policies D Make sure you have a robust and reasonable business plan that will entice funders and investors to Handbook give you finance Share and that can stand up to diligence. Unapproved Consider what you are willing to give away and whether Development Share or not you are comfortable meeting the requirements of a & Production finance provider. EMI S Consider any advice you need to take and the costs associated Protection with raising, and maintaining, financing. Consider the tax implications of any finance. Tax T Employment Taxes Funding VAT Corporation Out of Court Settlement Dispute Resolution DR Tax Re

8 Term on Key Lease Key Protections Rent & Other Charges Commercial CC Business Premises BP Corporate JV Contractual JV Employees E Optional Policies D Key Rights Development & Production Handbook Share Unapproved Share SO anaging Risk Accounting & Assurance AA Intellectual Property Protection EMI S Tax T Exit Planning Employment Taxes VAT Acquisitions Funding Corporation Ta PF Out of Court Settlement Dispute Resolution DR Tax Relie Strategic Plan Directors Company Formation CF Articles of Association Shareholders Agreement scinapse@geldards.com This briefing note is intended solely as an overview of the law in England and Wales. It was last updated on No responsibility can be accepted for the completeness or accuracy of this briefing note and professional advice should be taken in relation to any specific matters. Geldards LLP is a limited liability partnership registered in England and Wales (OC313172) and is authorised and regulated by the Solicitors Regulation Authority. A list of Geldards LLP members is available for inspection at our registered office at Dumfries House, Dumfries Place, Cardiff CF10 3ZF. We use the word Partner to refer to a member of the LLP or an employee of an equivalent standing and qualification. In this document, PwC or PwC UK refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. GV020615v16