Legal Sidekick for Seed Funding
You can use the Legal Sidekick platform, with the support of our partner legal team as and when you need us to complete your SEIS and EIS funding rounds. We provide a combination of technological efficiency, personal customer service and customisation…plus legal expertise developed at some of the world’s top law firms. To get started after reading this guide, check out our Funding contracts and build your term sheet.
Seed Funding Rounds – From finding the investor to money in the bank
The hardest part about seed funding rounds is unquestionably the part you do before you reach the legal aspect – i.e. finding your investors and agreeing your valuation. But once you have investors lined up, what exactly happens next up to get their investment sitting in your business bank account? Here, we summarise the answer.
Step by Step Guide
1 – Agree the number of shares – taking account of a key pitfall
There are two approaches to this, and one is more investor friendly than the other – we’ll use an example to illustrate it of where the company is registered with 100 shares of £0.01 each, and it is raising £100,000 from an investor.
Option 1 – Investor Friendly Approach (Legal Sidekick recommended):
- I am raising £100k in exchange for 20% at a pre-investment valuation of £500k. There are currently 100 shares, each of £0.01 in issue (i.e. 1p).
- If I issue the investor with 20 shares (20% of 100) then they will have 20 shares out of a new total of 120 shares (after incorporating my existing 100 shares) – and 20 shares is not 20% of 120, it is 16.66%. (see Alternative Approach)
- Therefore, to ensure the investor holds 20% after the share issue, I establish that my existing 100 shares will represent 80% after the share issue, and so I then just work out what 100% will be, subtract my 100 shares, and then I am left with what I should issue the investor:
100 / 0.8 = 125
125 – 100 = 25 shares to issue to the investor
Option 2 – Alternative Approach
- I am raising £100k at a pre-investment valuation of £500k. There are currently 100 shares, each of £0.01 in issue (i.e.1p).
- The post-investment valuation after I add £100k is £600,000
- If 100 shares represents £500k in value, then an additional £100k would represent an additional 20 shares being issued.
- So I issue 20 additional shares in exchange for £100k.
- There are then 120 shares in issue. I hold 83.33% and my investor holds 16.66%.
Ultimately, the approach depends on what was agreed with the investor, but if you agree that they will take an agreed percentage, then they will expect to hold that percentage after the investment round – meaning Option 1 is the only viable approach there.
2 – Agree whether investors will receive SEIS and/or EIS Tax Relief
SEIS + EIS = amazing ways for startups to sweeten the deal for investors by making tax relief available to them on their investment.
SEIS – Seed Enterprise Investment Scheme (applies to the first £150k of investment) – https://www.gov.uk/guidance/venture-capital-schemes-apply-to-use-the-seed-enterprise-investment-scheme
EIS – Enterprise Investment Scheme (applies to the remainder of your investment up to £5m per year – so if you’re going beyond that then, wow, good luck to you!) – https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme
In short, if you are a new startup not operating in a restricted field (e.g. property investment, legal services), you are likely to qualify for this. Both schemes entitle investors to amazing tax reliefs which effectively mean that a large percentage (50% for SEIS and 30% for EIS) of the amount invested is not actually money the investor would have had without the investment – it is money that they owe as tax, but are entitled to reduce their tax bill by the amount invested. So actually when you receive an SEIS investment, 50% of it is coming from HMRC, and when you receive an EIS investment, 30% is coming from HMRC (effectively). The further added benefit for investors is that provided the investment lasts for at least 3 years, they will likely pay no capital gains tax on the gains they make from investing in your business.
If looking for help with your SEIS/EIS applications, please let us know.
3 – Send the investors a term sheet and agree it with them
A term sheet is a non-legally binding summary of the terms of the investment. It is an indication of what will be in a final investment agreement, and sets out the headline terms in advance. It is much easier to negotiate and agree key principles in a 2-4 page term sheet than a 20-30 page agreement.
This will cover the basic commercial agreement (i.e. the investment amounts, valuations and the number of shares being granted in the round, and SEIS/EIS treatment), terms of how the company will be managed on an ongoing basis (e.g. relating to director appointments and meetings), agreements relating to dealings in shares (i.e. transfers, sales, new issues, share options), rights of investors to impact decision making, and other general contractual points (e.g. confidentiality).
4 – Send the investors a long form Investment and Shareholder Agreement + Articles of Association
Investment and Shareholder Agreement
Once the headlines terms are agreed, you can send the full agreement to your investor(s) which covers all the headlines from the term sheet, and contains more detail on the legal terms of the agreement. This is in theory a complex document because it covers procedures for a number of different eventualities around future events in the company, some of which (particularly around shares) are not simple.
However, provided you use a reliable document, use a reliable service to help you understand the key parts, and are open with your investors, then this can be a smooth process. Legal Sidekick offers this service and you can create your SEIS-friendly version here.
SEIS/EIS practical point: if you are receiving funds from more than one investor and you intend to apportion SEIS and/or EIS reliefs between them, then you should ensure that all SEIS amount arrive first, and EIS funds arrive after – which means that each investor may need to pay in instalments. Principally, this is because the SEIS relief applies to the first £150,000 of investment in your business, so if you have more than one investor and the SEIS relief is being apportioned between investors, then you need to ensure that the first investor to transfer funds does not inadvertently take the full SEIS allowance by accident.
Articles of Association (i.e. your company constitution)
In practice, we prefer to cover all key points in the Investment and Shareholder Agreement to keep things centralised – i.e. if you need an answer, you go to the Investment and Shareholder Agreement – and there’s no confusion with whether to look in the Articles of Association or Investment and Shareholder Agreement.
Having said that though, it makes sense to keep your company Articles of Association consistent with your Investment and Shareholder Agreement. Equally, if there is ever conflict between the two, the Legal Sidekick approach means that the Investment and Shareholder Agreement will take priority.
5 – Other Associated Documents – get them ready
- SH01 Form – share allotment form which is sent to Companies House to issue the new shares to investors. If you are receiving money in SEIS and EIS instalments, then you can have two SH01 forms – one for the SEIS investment and one for the EIS investment. See an example SH01 here.
- Board Meeting Minutes – a written record of the decision of the director(s) to enter into the investment deal. Create board minutes here.
- Shareholder Resolution – a written record of the decision of the shareholders to update the articles of association, and to approve issuing new shares. Get your template here.
- Share Certificates – certificates granted to confirm the shares held by each shareholder. These don’t need to be pretty or fancy! Get your template here.
6 – Founder Service Agreement(s)
Once you have an external investor or investors on board, you will likely need to formalise your own relationship with your company. The Founder Service Agreement is like your employment contract with your company, and will generally contain non-compete provisions, and a vesting schedule as a means of protecting your investor from the worst thing that could happen to the company – the founder leaving it!
Whether you need one at all, and the strictness of terms here will depend on your investor, so the Legal Sidekick approach is to use a reasonable, standard form Founder Service Agreement which you can then adjust if you want to.
7 – Finalise and Sign the Investment and Shareholders Agreement
With any investment, there is a reasonable chance that investors will suggest amendments to the documents and raise queries. If they do have them, our legal team can support you, and once ready, all documents can be signed and you can agree an exact date for all funds to be transferred.
8 – Finalise and Circulate the Remaining Documents
Once all documents are signed and money is transferred, you can finalise all the other associated documents from point 5 above – i.e.:
- Register your SH01 form with Companies House
- File your signed board meeting minutes and shareholder resolutions (internal only)
- Ask investors to sign and return investor subscription letters to you
- Issue investors with share certificates and say thank you!
Alternatively, if the above all seems long and painful for you, you can reach out to us request a quote from our partners at Accelerate Law for completing the legal part of your funding round for you, including all the documents and processes in this guide.
Legal Sidekick is a legal platform for startups. You can access seed funding templates and investment agreement templates and other startup legal documents and guides via our platform. Along with our partners, we help entrepreneurs and startups cut the stress, expense and confusion out of law for startups.
This article was written by Simon Davies, founder of Legal Sidekick.