As soon as you move beyond working on ideas, market research and business plans in the back bedroom, the need for cash to fund the next stage becomes a top priority.
At this point many business founders turn to “friends and family” who are prepared to invest some initial capital, often more on the basis of love and affection rather than any real expectation of a financial return. Often, by their nature these types of arrangements can be a little too informal, which can cause problems down the line. A classic case would be the promise of more shares or options to these people (or others) at some point. This is a recipe for trouble. People either have shares (or options over shares) or they don’t – and whatever they do needs to be done in the right way and evidenced with the correct documentation.
Early stage businesses often need expert help with a wide range of things including IP, technical development, marketing, fund raising and legal structures. A persuasive entrepreneur may be able to get some of the people needed to give this support on board for low initial fees or the offer of minority shareholdings in the business.
There are now also a range of investment funds who specialise in early stage investment. I act for a number of such funds, which offer investors who put money into them, significant tax reliefs under the Enterprise Investment Schemes. The first of these reliefs was introduced in 1994 so they are well established as well as being HMRC approved.
These funds are also attractive to investors because they pool the monies and then invest in a range of different qualifying companies, thereby spreading the investors risk across a portfolio. These funds can be a great source to cash hungry early stage businesses looking for equity Investment. According to government figures issued in May 2019 there have been 29,770 companies which have benefitted from investment under the Enterprise Investment Scheme (EIS) and £20bn of funds have been raised. Under the Seed Enterprise Investment Scheme (introduced In the 2012-13 tax year and aimed at smaller, earlier stage companies) over £1bn has been raised and investment made in 12,900 companies.
These Schemes are not the only source of early stage and follow-on investment but have been a key factor in supporting an explosion of entrepreneurial activity, particularly in sectors such as Information and Communication which attracted about a third of all EIS investment in 2018-19 tax year.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.