With so many competing demands for your time and resources, legal considerations are easy to push down your list of priorities.
You’re an entrepreneur and you’re ready to start fundraising to drive the growth of your start-up. Your business model is viable, you’re gaining traction and you’re learning fast. With so many competing demands for your time and resources, legal considerations are easy to push down your list of priorities. However, this can lead to significant, unnecessary and expensive problems down the line. With such a large array of DIY legal sites on offer, many start-ups believe that acting as their own advocates when raising finance is a good way to save on the extra expense. However, there is so much red tape out there that even the canniest founders can be unaware of certain legalities— seeking professional advice is always wise. In the meantime, here are three common mistakes to avoid:
1 Advertising to/and or soliciting investors
As a private limited company you are not allowed to offer your shares to the general public (because that would be termed a public offering), unless you are restricting the promotion to 150 people or achieve cover through a third-party who is authorised by the Financial Conduct Authority (FCA). Go above this number with an offer for equity investment and you’re breaking the law. It is crucial to fundraise through a platform or investment manager that is fully compliant with the law and FCA regulated.
2 Failing to adhere to pre-emption rights
Pre-emption rights are a shareholder’s right of first refusal over the issue of new shares in the capital of a company. This helps protect your shareholders from being diluted without their consent and these rights can be found within the Companies Act of 2006. So far, so simple. However, if your company has different classes of shares (say A, B or C shares) and you only issue B shares, you need to note that only the B shareholders will be entitled to purchase those shares under the pre-emption right, in proportion to their existing B shareholding. This is just one example of the many complex aspects of this clause. It is therefore crucial that that articles of association and shareholders’ agreements are checked when a new issues/transfer of shares is proposed and that directors know the correct procedure – and stay within the law.
3 Not keeping your investors informed
This last one isn’t exactly against the law, but a good entrepreneur will treat it as such. Once you’ve raised capital – your focus is on growth, sales and marketing and making money. It is easy for the entrepreneur to forget their shareholders and this can be a costly mistake to make – and not just in financial terms. Experienced, sophisticated angel investors understand the complexity and rocky nature of start-up growth and many have been through the same ups and down of growing a successful business. Relationships still matter in the corporate world and this is never truer than when thinking about the people who backed you in the first place. Human nature dictates that you only want to inform your investors if the news is good; in reality they need to hear the bad stuff too. Who knows, they may just have the perfect solution.
Ignorance of the law is never an acceptable defence and even the most cash strapped start-up needs to adhere to the rules.
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