While funding can be one of the most exciting aspects of launching your startup, it can also be one of the most stressful. Here's a quick guide on how to get funding and the legal implications of doing so.
How much money do you need to launch a startup?
The amount of money required to launch a startup varies from business to business. The easiest way to assess this is to draw up a realistic business plan which should include sales and expenditure forecasts so you can calculate the amount of money you will need each year. Be sure to include statistics like your runway (the amount of time at any given point before you run out of money) and your burn rate (how much more money you are spending than receiving).
This will also help when seeking funds for your start-up from external investors, as they will require detailed specifics about how much money you will need from them and what exactly you will spend that money on.
Don't forget that seeking, applying and gaining investment is an ongoing process. Return to your business plan and particularly your investment plans and review these, as well as your financial position, regularly.
What are the different types of funding available for startups?
- Bootstrapping - Yours, your friends and your families savings and internal revenue.
- Loans and Grants
- Crowdfunding - Small amounts of money from several investors.
- Angel Investment - Wealthy individuals who invest in return for convertible debt or equity in your business.
- Venture Capital Investment - Investors who provide money in exchange for a stake in your business.
What are the advantages of bootstrapping?
- Frees up your time to focus on your product and other areas rather than hunting for investors.
- Signals to investors that you are committed to your business.
- Encourages you to focus on customers rather than investors.
- Your stake in the business remains unchanged leaving you in full control of your business.
What are the disadvantages of bootstrapping?
- You can quickly end up in debt by placing yourself at high financial risk.
- The growth of your startup may be slower than could be achieved with other, more significant forms of investment.
What are the legal implications of bootstrapping?
- If the business fails, you could lose your assets and personal savings.
- The legal structure of your business will affect how you can transfer money into it and the implications of doing so.
- Recording yours, your friends or families investments as a loan or equity will have different consequences.
2. Loans and Grants:
What are the different types of loans and grants available to startups?
a. Small Business Loans - Repayable loans with interest from banks or other types of lenders.
b. Government Startup Loans - Repayable loans for between £500 and £25,000 for a period of one to five years, with a fixed rate of interest of 6% per year.
c. Government Grants - Non-repayable grants from the government given to businesses in certain sectors.
What are the advantages of loans and grants?
- Provide a more accessible method of funding.
- If grants are available for your business, they are essentially free money.
- Some providers offer mentoring and other benefits alongside startup loans.
What are the disadvantages of loans and grants?
- Security for the loan may be required putting you or your property at risk.
- Interest rates can make loans expensive.
- Grant applications may be time-consuming to complete.
- Some grants will require matched funding from other investors.
What are the legal implications of loans and grants?
- Missed repayments could result in personal liability and high levels of debt. Therefore, your property or other assets may be recovered to pay debts owed.
- Loan agreements can contain many unfavourable terms which you should get reviewed before agreeing to them. Lexoo has many Banking and Finance lawyers who can review your contract for you.
Did you know, the average successful crowdfunding campaign raises £5,300.
What are the advantages of crowdfunding?
- Crowdfunding platforms spread the word about your company and its products.
- The experience, contacts and knowledge required by some other more sophisticated types of funding are not as crucial to crowdfunding.
What are the disadvantages of crowdfunding?
- Crowdfunding platforms typically charge a fee for their services making it expensive.
- May require you to give away a significant proportion of ownership.
- Best suited to businesses who sell to consumers rather than other companies.
What are the legal implications of crowdfunding?
- Sharing your products and ideas on sites could expose your intellectual property. Protect it beforehand by using an IP Lawyer on Lexoo's platform, saving you up to 46% on average.
- Consider any tax implications of crowdfunding.
4. Angel Investment:
Did you know, the average equity sought by angel investors in return for their investment is declining year-on-year.
What are the advantages of angel investment?
- Security for the investment is not required as it is for other types of investment.
- You don't necessarily have to repay investments as the return is given upfront as equity.
- Angel investors are likely to have the experience and expertise to consult and advise you.
What are the disadvantages of angel investment?
- Not suitable for investments of amounts below £10k or over £500k.
- Exchanging equity in your business for investments will reduce your ownership.
What are the legal implications of angel investment?
- Investors will want to benefit from the tax implications under the Enterprise Investment Scheme. Ensure your company is set up in a way that lets them do so.
- Investors will need assurances that the biggest customers and suppliers have committed to your business. A simple contract will fulfil this requirement. Submit an enquiry on Lexoo for a transparent, low-cost quote for a commercial contract lawyer.
- Investors will need your intellectual property protected before they invest. Reach out to an IP Lawyer on Lexoo's platform to do so, saving you up to 46% on average.
- Angel investors may seek a convertible debt (a debt that later converts to equity) in exchange for their investment.
- Angel investors are likely to insist on creating a new shareholders agreement (usually drafted in their favour). You should get this reviewed by a corporate lawyer. You can find many experienced lawyers who specialise in shareholder agreements on Lexoo.
5. Venture Capital Investment:
Did you know, the median Series A deal size in 2017 was £4.6m, up by 23% from the year before.
What are the advantages of venture capital investment?
- Venture capitalists provide access to large amounts of investment unattainable through other types of investment.
- You're not necessarily obliged to repay the investment as the return is given upfront as equity.
- Venture capitalists are likely to have substantial expertise and experience within your sector which they can use to guide and consult you.
What are the disadvantages of venture capital investment?
- With each round of financing, existing shares become diluted (however this is rectified by the increase in the value of each share due to the new investment).
- You will need to provide the investors with a convincing exit which usually centres on going public or selling off.
- Generally, this type of investment is unsuitable for amounts below £500k.
What are the legal implications of venture capital investment?
- Investors may seek preferential shares which give them priority over other shareholders to get their capital back on exit or liquidation.
- Investors may demand a seat on the board to increase their control over their investment. Remember this will reduce your power over the business.
- Investors commonly tranche their investment to reduce their risk.
- Venture Capitalists are also likely to insist on creating a new shareholders agreement (usually drafted in their favour). You should get this reviewed by a lawyer, why not submit an enquiry on Lexoo to get a fixed fee quote from a shareholder specialist.
Whether you choose to fund your startup through bootstrapping, loans, grants, crowdfunding, angel or venture capital investment, if you need assistance with any of their legal considerations, or need advice on which method of financing is right for you, why not reach out to Lexoo. We can offer you transparent, fixed fee quotes from a selection of 760 expert lawyers in over 50 jurisdictions within one to two business days.