Many businesses are started with the idea of selling them one day. Even if that isn’t on the cards, it’s a rare company that won’t one day want outside investment to grow the business, whether you’re seeking venture capital from an international fund or a new partner to take up a shareholding.
In either case, your task as a business owner will be immeasurably easier if you lay some basic legal groundwork early on.
The essential principle to keep in mind is this: complication and clutter can alarm investors. The less complex your capital structure and financial statements, the more reassured they can be that they know exactly what they’re getting themselves into.
6 Essential steps before opening your doors, and your books, to potential investors
- Keep things tidy. Start-ups and young companies typically have multiple loans and elaborate contracts designed to help fund growth in the early days, for example, loans which are convertible into shares or even by granting an option to a landlord in return for a lower rent. If that’s you, take action now to consolidate your balance sheet.
- Maintain a clean shareholding structure. Where there are lots of “rats and mice” minority shareholders, there is potential for uncertainty and confusion for investors.
- Allocate shares to your founders and anchor investors early on. The later you leave it, the more value they have, and the greater the tax hit will be.
- Give up any thoughts you may have of recouping all that sweat loan account in cold hard cash – here we are talking about salaries sacrificed or other money foregone. It’s very unlikely you’ll find an investor who’ll be prepared to treat sweat loans by a founder as a true cash loan.
- Take a good hard look at your board: Do the directors add real value to the business or are they largely family members, angel investors and other founders with experience as limited as your own? Look for board members who can provide useful advice and guidance, and whose CVs will make you look credible to potential investors – remember, they are buying into the executive team.
- Check who actually owns your fundamental means of production. If you’ve built a product, be extremely careful that you own the “building blocks” and/or have a valid license to use those components. In the case of open source software, are you within the license terms?