Existing investors, if you have any, will normally have pre-emption rights, which basically means that when the Board decides to raise £X capital at £Y price, that current shareholders will have the right to purchase further shares according to their shareholding percentage.
As the directors consider how to tackle fresh funding, it is important to understand that potential investors and existing angels do not have an alignment of interests until the round closes. Bringing in fresh investors capital is important to the overall success of the Capital Model. Existing investors, particularly those without the experience to see the negative longer term effect of a static share price, can look to avoid dilution by buying more of the company at zero improvement to valuation. Whereas if the round is not supported by any current shareholders, your angels may be ‘exhausted' and the new angels can become vultures forcing a new price.
Do not rely on a single source. That is a recipe for disaster. It is not always possible, and indeed not always advisable, to be pitching to large groups of angels at once as you can end up with ‘Block' votes. There is clearly a trade off between the management challenges of having more shareholders, versus the improved firepower and contacts of a wider shareholding base. The Board should act in the Company's interest and have neither overvalued, nor undervalued share pricing. In the long run, supportive angels may pass the baton to institutional Venture Capital and all will want to see an ‘up' round and a journey to an eventual exit showing a material capital gain. The jump from angel to VC is for a future blog... Watch this space.
It is advisable to have started to pitch to new and warmed up existing angels in advance of opening the round and distributing the necessary ‘rights issue and open offer' paperwork. When you get some strong expressions of interest from existing and new shareholders at the quantum and valuation desired, you will need to review your 5 ingredients. Are you ready to play ‘Snakes and Ladders?'
SPEED: If a round is open too long, you will slither down the Snakes as well as climbing the Ladders. As described in my previous blog on ‘pitching for capital', an individual investor will have made a commitment 8 weeks ago to invest when the pitch was fresh in their head, but may have decided to scale back or have other commitments for their capital.
GOOD NEWS: Roll a double six, catch a ladder and move towards your target quantum quickly. Roll low numbers and catch a snake and you are back down. Investor sentiment is tough. If they are expecting a major contract or piece of traction and it fails to materialise your round is under pressure. Pull out a major contract or key milestone as the round is building and watch it become oversubscribed as all those who have enjoyed a pitch in the preceding weeks suddenly remember why they liked you so much.
FIRM DEADLINE: Your prospective business angels are all very busy people. Without a clear deadline and the prospect of missing out, many will not get their money mobilised and their forms completed. A firm deadline forces them into the game. If you have the good news, you have an excellent chance of the right decision. Expect to be manning the phones. Drink lots of coffee. Get on a roll. Let investors know you are on a roll. Enlist help. If you have good NXDs, who are investing their own money, get them to make a few calls.
SOLID PROCESSES: You need to plan your method of keeping score. You will need names, addresses, phone numbers, anti-money laundering checks, certificates of high net worth or sophistication (that the individual is appropriate for high risk investment decisions), numbers of shares, monies received, Powers of Attorney and a host of other bits and pieces. Investors may also be looking for their investment to be Enterprise Investment Scheme (EIS) compatible. http://www.hmrc.gov.uk/eis/ If your funding is coming through a syndicate of angels, much of this may be collated for you and your legal advisor.
EXPERIENCED LAWYERS: Good lawyers with stacks of experience in this arena will help guide your processes and be able to deal with the game as it unfolds. Choose carefully. Speak to other founders. The One Place Capital has used Edinburgh firm www.mbmcommercial.co.uk for angel rounds through the early years as Money Dashboard developed from first concept. You need your lawyers to be practical, rather than point scoring.
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