If you’ve joined a high growth business as an in-house counsel, working on successive financing rounds is likely to be part of your near future. Even if you’re an experienced corporate lawyer, working on the client side of these processes can be a very different beast.
Where do you begin? What are the red flags to look out for? How can you make sure this process runs smoothly?
We’ve collaborated with our friends at Globacap to bring you the ‘Adventures in Venture’ series and address some of these questions. Teaming up with five experts with very different, yet complementary perspectives, we asked: ‘what are the three things a lawyer needs to know about venture financing?”
Three key tips for scaling up sustainably from the series with insights from:
- The former Fintech General Counsel back in private practice – Sam Ross, Head of Scaleups at Stephenson Law
- The investor perspective – Victoria Wells, Director of Operations at Entrepreneur First
- The crowdfunding expert and legal tech founder – Paul Massey, CEO of Tabled and ex GC of Crowdcube
- The venture capital lawyer – Henry Humphreys, Lawyer and Founder of Humphreys Law
- The in-house venture-backed startup lawyer – Collette Kerrigan, Legal Director at Lyst
The right law-firm or team
You’re almost inevitably going to lean heavily on external counsel if you’re contemplating a fund round of any significant size. Tip number one would be to pick the right external law firm to support on that round, and do it early.
Sam Ross, Head of Scaleups at Stephenson Law, suggests that you arrange to meet your company’s law firm (or firms!) early in your tenure as in-house counsel. By doing so, you can get the lowdown from them on past deals with your company and any issues that may have arisen. It’s also a great way to sniff out the firm, establish a rapport and build trust before you might end up in a deal process – and figure out precisely who would be working on your file (not just the partners!).
This is a point Henry Humphreys would agree with. Henry runs his own boutique practice, and he observes that your external counsel should have accumulated a great deal of sector experience, including what’s market on deal terms.
Lawyer up, as the Americans say.Henry Humphreys
If your deal involves a crowdfunding element, it’s critical to make sure that the law firm and team you’re working with do indeed have experience of structuring a crowdfunding round. Make sure they understand how to ensure a large group of investors can be managed with ease, perhaps alongside the more mainstream VCs, as Paul Massey, former General Counsel at Crowdcube and Founder of Tabled, shares.
Managing your investors
Speaking of managing investors brings us nicely onto tip number two.
Every name on your cap table is a person. One who’ll be involved with your company all the way to exit. Sam’s advice is to make sure you do your homework about those people. Research your investors: What other companies are they invested in? What might they be looking for in terms of their strategy? Henry Humphreys asks, is your company happy to be getting into bed with them as partners? As a lawyer that decision may be taken elsewhere, but you can certainly help guide your management team and anticipate any complexities arising from what you learn about the new investors.
Collette Kerrigan is the Legal Director at Lyst, who have raised several successive venture financing rounds. Collette’s advice is to think really carefully about the governance rights and controls that you’re granting your investors in this latest round – “never follow a precedent blindly”, Collette says. If your cap table includes a long tail of investors with relatively small shareholdings (perhaps rolled over from previous rounds), you need to be particularly careful about anything requiring unanimous investor consent. Otherwise, you can anticipate spending a lot of your future time chasing down these shareholders for waivers and consents.
Just think about the people, before you think about the legal documents.Sam Ross
Not only do you have to think of your investors before the fundraising round, but also consider how you’ll manage them after the investment. Paul Massey talks to us about the importance of post-investment communication and maintaining a solid relationship with investors. As he says, keeping your investors up to date with commercial progress through regular investor updates helps maintain the relationship should you need shareholder approval or participation in further fundraising down the line.
As you close larger and more sophisticated funding rounds, and introduce complexities such as convertible debt or an option scheme, you may find that the excel sheet your company has been using to manage its cap table is starting to creak. Indeed, Paul Massey recommends thinking about what system you want to put in place to manage your cap table, given the limitations of spreadsheets. Cap table software providers such as, our partner, Globacap can step in as a single reliable source of truth as to who owns what. Globacap also allows you to manage investor communications, Companies House filings, employee option schemes, and secondary share transfers – all on the same platform.
Timings and scheduling
How many times have you been working on a deal that had a very specific timeline, but something that could have been foreseen pops up and derails that entire timeline?
Victoria Wells, Director of Operations at Entrepreneur First, stresses the importance of giving yourself plenty of time in your schedule to cater for the unforeseen. As Victoria reminds us, don’t forget your minority investors. Even if they aren’t investing this round, or if they’re writing a smaller cheque, remember them and that they’ll have requirements too (such as relating to due diligence or understanding their new co-investors). Talk to all your investors to learn what terms they might need in the documents. If you don’t – you can risk delaying, or even jeopardizing, your deal, as you rush to bring your minority up to speed on what is happening and why. And you will undoubtedly need to factor in more time for discussions with smaller shareholders, if you’ve been inspired by Collette Kerrigan’s video and are looking to revisit your governance provisions!
Moreover, Sam Ross stresses the importance of getting your deal data room in order well before the deal gets into flow. You don’t want to be set back by missing documents or embarrassing delays in responding to predictable information requests. Ask your colleagues up front for the documentation that investors are likely to need – and use the time to solve any problems that this process brings out.
As we’ve seen, there are lots of things to consider when going through a fundraising round. And with so many moving parts, it can be overwhelming. However, these three tips are a starting point to helping you scale up sustainably and successfully.
This series of tips for lawyers about venture financing was made possible by the generous support of our partner, Globacap. Globacap is an online platform that automates private capital markets, empowering companies to grow more efficiently, and stay private for longer. Globacap provides secure, digital tools to raise capital more effectively, manage share registers, investor relations and employee share options more efficiently, and facilitate and settle secondary liquidity in real-time. All accessible on your desktop 24/7. Globacap is regulated by the FCA.