Raising growth capital for businesses is a challenge. From a legal perspective, there are steps you can take to make the investment process more straightforward.
Before a private equity or venture capital investor commits itself to a deal, it will generally carry out a thorough legal due diligence exercise. This process can take a lot of time which means the day job of scaling the business and driving revenues can be hindered. To limit the distraction that due diligence can cause, we advise that companies who are seeking to raise growth capital (Series A and beyond) undertake an 'investment readiness' legal audit.
The 'investment readiness' process involves working through the areas that an investor will focus on from a legal perspective. These areas typically include:
Shareholdings, structure and constitution - An investor will review the company's statutory books, to ensure that they are consistent with the Companies House filings and they will also want to review the articles of association and any shareholders' agreement or investment agreement to check whether any existing investors can block a new investment.
Contracts - An investor will want to know that the company's relationships with important customers and suppliers are properly documented.
Intellectual property - If the company has valuable intellectual property an investor will wish to ensure that the company owns or has valid licences to use such intellectual property
Information technology - Most businesses are now heavily reliant on information technology. An investor will check if the company has robust information technology systems in place, backed up by the correct contractual documentation
Data protection - An investor will need to be satisfied, particularly where the company deals with personal data, that the correct legal safeguards are in place as regards the use, storage and sharing of data
Employment - If the company has employees, the investor will want to see evidence that they have been properly engaged and statutory requirements have been met.
Carrying out an investment readiness audit will:
give management and their advisors the opportunity to identify and, often, rectify any issues that might otherwise weaken the company's bargaining position, allow the investor to reduce its valuation or even cause the deal to abort
give management and their advisors much greater confidence in their negotiations
require management to compile key documentation so that it is organised
It is clear that, when it comes to raising capital, being 'investment ready' can make a huge difference to the ease at which the investment proceeds, whilst helping to protect the valuation of the business.