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.

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2 RF CORPORATE JV CONTRACTUAL JV COLLABO 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. 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: Debt finance such as a bank loan Equity finance a purchase of shares in the company Debt 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 dedicated contact to the business who will seek to work with you to ensure their money is protected. Contractual terms, known as covenants, include items such as notification BENEFITS OF AUDIT MANAGING RISK of the lender under certain circumstances or changes to the loan terms in the event of specific criteria being breached. 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 the loan, which is a common practice when it comes to start-up businesses. There are additional forms of debt financing available depending on the nature of your business, such as trade or asset backed finance or invoice discounting. If circumstances permit, you can also lend to your business in the form of a director loan. COSTS & CONSIDERATIONS RF OF 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 that they deem more risky (although it ACCOUNTING AA should be noted that each lender will have its own individual & risk ASSURANCE 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 PF loan/facility can be crafted to compensate the lender for perceived risks. Some debt finance may also be convertible to equity under certain conditions. ACQUISITIONS FOR THE FUTURE SECURITY You may be asked by the lender to provide some form of security against the loan. This is known as a secured loan. Security can be in the form of almost any asset of the business, as long as the lender believes it has STRATEGIC PLAN value, and can include tangible assets such as equipment or properties, or even intangible EXIT assets such as intellectual property. This security allows the lender to bear the risk of making the loan because if your business is unable to repay the loan, the lender will assume ownership of the asset. The value placed upon the asset will differ between the lender and the business, for example, a key piece of patented technology may be JOINT VENTURES JV C F

3 ICT OPTIONAL POLICIES V BUSINESS PREMISES BP PROTECTIONS ORATION EMPLOYEES the most vital asset in your business, but to a lender this will represent something that is hard to monetise. COMMERCIAL CC An unsecured loan, where no security is given to the lender, is inherently moreip EXPLOITING risky and therefore the lender will expect higher interest payments or charges risk, IP or INTELLECTUAL in order to justify taking this PROPERTYtheIPamount prepared to berights lent will be reduced. It can be difficult for businesses without a large fixed asset base to secure PROTECTING IP favourable terms from a lender as there is limited security that can be given. COLLABORATION SHAREHOLDER GUARANTEES An alternative to the security mentioned PROTECTION above, which can prove useful in early stage businesses with limited assetsd DEVELOPMENTto& offer as collateral, is a shareholder PRODUCTION 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 ARTICLES you should seek expert advice before OF ASSOCIATION proceeding with such an arrangement. COMPANY FORMATION CF DIRECTORS E HANDBOOK JUNIOR VS SENIOR It may be the case that your business RENT & from OTHER takes debt funding two separate CHARGES parties, or that a single lender is providing two or more tranches of LEASE funding, each with different terms. The different TERMS OF funders or tranches will beoccupation given different levels of seniority relating to the order of repayment in the event of insolvency. The most senior debt will be first to be repaid, followed by the next senior and so on. Junior debt is the most risky, and accordingly bears a higher rate of interest. As with any important decision about your business, it is important to give serious consideration to debt financing and in particular the terms surrounding any agreement. Identify any onerous terms and ensure you know what you are signing up to, and most importantly, DR ensure that your business is able to meet the interest and principal repayments. You should make sure you understand any covenants contained in the contract, and that you are clear what you can and cannot do without the lender s consent. SHAREHOLDERS AGREEMENT DISPUTE RESOLUTION FUNDING EMI SHARE SIP SO UNAPPROVED SHARE TAX T VAT TAX RELIEFS EMPLOYMENT TAXES CORPORATION TAX OUT OF COURT SETTLEMENT LITIGATION RF

4 RF Equity 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. Equity 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, professional investors who will require more protection and more complex contractual arrangements compared with friendly investors such as friends or family. When obtaining equity finance, there are numerous considerations to think about: VALUE Selling shares requires a valuation of the business to identify the value of each share. It is difficult to value a business as there are many subjective elements involved and it is ultimately a compromise between the existing shareholders and the investor. This is particularly difficult in early stage companies which may not have a visible track record of profitability or dividend payments. 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. BENEFITS OF AUDIT MANAGING RISK 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. up a competing business RF using similar intellectual property, or poaching key staff or customers. Existing shareholders will usually have first refusal if the company ACCOUNTING issues AA new shares or if one shareholder & ASSURANCE 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 rights which, respectively, allow the majority shareholder to force the minority shareholders PFinto 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. ACQUISITIONS FOR THE FUTURE STRATEGIC PLAN CORPORATE JV WARRANTIES Management, shareholders or both will be required to give warranties to investors regarding the assets and liabilities of the business. This can present a risk to the shareholders down the line and requires careful consideration to ensure they are fair and reasonable to both parties, and the potential liability on management/ shareholders is appropriately limited. RESTRICTIVE COVENANTS Investors will want to protect their investment and will seek to restrict the ability of management setting SHARE TRANSFERS 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 EXIT 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). CONTRACTUAL JV JOINT VENTURES COLLABO JV C F

5 ICT OPTIONAL POLICIES V BUSINESS PREMISES BP PROTECTIONS ORATION EMPLOYEES EXPLOITING IP IP RIGHTS PROTECTION DEVELOPMENT & PRODUCTION COMPANY CF FORMATION LEASE TERMS OF OCCUPATION EMI SHARE SIP SO UNAPPROVED SHARE SEEKING PROTECTING IP COLLABORATION HANDBOOK RENT & OTHER CHARGES COMMERCIAL CC INTELLECTUAL PROPERTY IP E TAX T Any approach you make to a potential 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 VAT be covered by an exemption. Approaches to banks and private D equity are generally exempt as they are authorised persons, whilst TAX RELIEFS communications to business angels are often able to benefit from EMPLOYMENT certain exemptions for sophisticated investors or high net worth TAXES DISPUTE DR individuals. The regulations surrounding approaches cover all CORPORATION TAX RESOLUTION aspects and can affect something as simple as a business plan. It is strongly advised that you seek legal advice, and potentially corporate finance advice, prior to making any approaches to potentialof investors to ensure you are in compliance with the law. OUT OF COURT ARTICLES ASSOCIATION SETTLEMENT FUNDING LITIGATION SHAREHOLDERS AGREEMENT DIRECTORS

6 RF CORPORATE JV CONTRACTUAL JV COLLABO JOINT VENTURES JV ATTRACTING FUNDING 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. RF 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. GRANT FUNDING BENEFITS OF AUDIT MANAGING RISK FOR THE FUTURE ACCOUNTING & ASSURANCE PF AA 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 Information and Communication Technology 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. ACQUISITIONS STRATEGIC PLAN EXIT C F

7 ICT OPTIONAL POLICIES V BUSINESS PREMISES BP PROTECTIONS ORATION EMPLOYEES EXPLOITING IP TERMS OF CHECKLIST OCCUPATION Do you need to raise finance? If the answer is yes, be clear on why and what it will be used for. TAX D Make sure you have a robust and reasonable business plan that will entice funders and investors to give you finance and that can stand up todrdiligence. EMPLOYMENT TAXES DISPUTE RESOLUTION Consider what you are willing to give away and whether or not you are comfortable meeting the requirements of a finance provider. ARTICLES OF ASSOCIATION COMPANY FORMATION UNAPPROVED SHARE T Work out what is the most appropriate source of finance, given your objectives. COLLABORATION CF SIP SO IP RIGHTS PROTECTING IP DEVELOPMENT & PRODUCTION EMI SHARE LEASE PROTECTION HANDBOOK RENT & OTHER CHARGES COMMERCIAL CC INTELLECTUAL PROPERTY IP E DIRECTORS SHAREHOLDERS AGREEMENT TAX RELIEFS CORPORATION TAX OUT OF COURT Consider any advice you need to take SETTLEMENT FUNDING with raising, and the costs associated LITIGATION and maintaining, financing. Consider the tax implications of any finance. VAT

8 RF ICT BUSINESS PREMISES BP EMPLOYEES E OPTIONAL POLICIES HANDBOOK JOINT VENTURES JV COMMERCIAL CC INTELLECTUAL PROPERTY IP EXPLOITING IP IP RIGHTS TERMS OF OCCUPATION RENT & OTHER CHARGES LEASE SHARE SO EMI SIP UNAPPROVED SHARE RF COLLABORATION PROTECTING IP TAX T BENEFITS OF AUDIT MANAGING RISK FOR THE FUTURE ACCOUNTING & ASSURANCE PF AA PROTECTION DEVELOPMENT & PRODUCTION D DISPUTE DR RESOLUTION VAT EMPLOYMENT TAX RELIEFS TAXES CORPORATION TAX COMPANY CF FORMATION DIRECTORS ARTICLES OF ASSOCIATION SHAREHOLDERS AGREEMENT FUNDING LITIGATION OUT OF COURT SETTLEMENT ACQUISITIONS STRATEGIC PLAN EXIT 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 Solitors 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. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.