What will you need to spend in the process of raising capital?

by Startacus Admin

Raising capital for your business? Oliver Woolley, CEO and co-founder of Envestors shares insights on the real costs of doing just that...

As an entrepreneur you’ll see many opportunities for business growth. However, to achieve what you envision you may need more capital to ensure your business has the resources it needs.  You may decide that raising equity capital is the route to go but do you know what you will need to do and where you’ll need to spend to achieve this?

To help set expectations, Envestors, which has raised over £100m for 200+ businesses, has created an overview of the costs of raising capital. This quick guide will help you set a budget for your raise.

The guide covers costs for legals, advisory services, marketing, access to investors and the hidden costs of working with funds. As a rough guide it is recommended that, to cover upfront costs, you’ll need to have a chest of £7,000 to £29,000.  Factoring in success and/or monitoring and due diligence fees for funds, your total spend will be in the range of £20k to £60k, depending on where the funds come from and the total raise amount.

As a percentage of the amount raised, this can be as much as 9% to 24% for raises at or below the £250k mark. For raises above £500k it could be as little as 5% to 13%. 

How do the figures add up?

Legal fees

Selling shares in your business requires a number of legal documents. This is an area worth spending budget on – so if you find some handy free templates on the internet resist the urge and navigate away. What doesn’t seem like a big deal today, could be a huge problem for you later. While we always recommend working with a lawyer specialised in early-stage investments, you have a choice between platform-based services, like Seedlegals, which may be less expensive starting at £1,000 or firms like CMS, which while more expensive starting at £5,000, are a safer choice for businesses beyond the seed stage.

Legal documents you need include a Term Sheet. This is a summary outlining the material terms of the agreement. You can create this, and your lawyer will use it as a basis for further documentation.  You’ll also require a Shareholders Agreement, Subscription Agreement/Investment Agreement, Disclosure Letter, Articles of Association and Deed of Adherence (used when new investors are joining a pre-existing group).

Additionally, you’ll need a Service Agreement which includes employment contracts with the managers/directors, incorporating non-compete restrictions. Many investors will review employment contracts during their due diligence. It’s not requisite to launch your fundraise, but will required.

That is a lot of documentation to put together – especially if you’re just starting out. Sometimes smaller deals, under £100k will use a Letter of Agreement/Conditions of Investment Letter. These letters may be drawn up with little involvement from a lawyer. The advantage is that this process is quicker and cheaper; the disadvantage is that these documents may not incorporate proper legal protections for the investors. You may also need advice on your company’s Articles and the shareholder’s agreement (if there is one).

Tax advisory fees 

Businesses which qualify for the Seed and/or Enterprise Investment Scheme (S/EIS) will want to take advantage of the scheme as it is a major incentive for investors. However, as with all government schemes, S/EIS requires a fair amount of paperwork. It’s complicated and unfortunately easy to make a mistake. If you do apply yourself and make a mistake it might mean your application is rejected or it could mean that down the road your investors find out that they are not getting the tax breaks after all. Due to the complexity, we always advise working with a third-party on your application. Starting costs range from £1,500 – £3,000.

Corporate finance advisory fees 

In addition to legal advice, many seek corporate finance help to ensure they are ‘investment ready’. 

Investment readiness means you have a clear proposition, i.e. the answer to the question ‘why should I invest in you?’, and all requisite documentation to support your raise. Some Local Enterprise Partnerships (LEPs) or Chambers of Commerce offer subsidized ‘investment readiness’ programmes. The level of fees can be anything from £1,000 to £10,000, or a monthly retainer.

Marketing costs

Marketing costs vary greatly from one raise to another. Many choose to create all their materials in-house, while others splash out on snazzy pitch decks, multi-channel awareness campaigns and animated videos. The right amount depends on a number of factors, including your audience, the size of your business, your current level of awareness and what kind of investor you’re targeting.

For many, working with an agency to produce a pitch deck is a smart move. We see a lot of pitch decks which make it difficult to understand what the business is and why anyone would want to invest in it. Common mistakes include spending too much time on the wrong topics, jamming a novella onto a single slide and ignoring all basic principles of design. If an investor can’t understand what you do, they are never going to invest. 

Video has been shown to drive engagement and may be worth considering. However, a good video can be costly with £3k being a typical starting point.

Registration fees 

While many believe they can find all the investors they need using LinkedIn, the reality is that cold-approaching investors isn’t the best way to raise capital. 

There are organisations that have networks of registered investors; these networks have a good idea of the type of deals which will interest their community, however they do typically charge fees for access. 

Each network is unique; some charge for investment readiness and promotion while others charge a flat fee for access. 

Fees can be anything from £200 to £6,000 and depending on the service may mean you don’t need to spend on advisory fees.

Success fees 

Success fees are payable as a percentage of funds raised through an intermediary.  Typically, between 5% and 7%, although some will charge much more, of the funds raised. Some brokers may also ask for options. 

Due diligence fees and abort costs 

These fees are often charged when working with funds and cover the cost of conducting legal, financial and technical due diligence on your company. This can be anything from £10,000 to £25,000 and is typically taken out of the funds they invest. If you pull out of the deal, you may also be liable for these costs as an abort fee.  

Post-investment monitoring fees

Most investment funds will require you to pay monitoring fees once the funds are in place. These are usually around £6,000 per annum. In some cases, you may be able to increase the amount of finance raised to cover some or all of the costs.

So as with anything else, nothing in life is free. Sadly, it takes money to raise money. The trick is to understand the scale of costs up front and to ensure that you spend money on the right things to give yourself the best chance of raising the money you need to grow.

It is a fact of life that to raise the money you need to grow you’ll need to spend money.  By budgeting carefully and spending money in in the right places you’ll be well placed to attract the capital you need for the growth you envision.

ABOUT THE AUTHOR

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK. Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks. Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club. Envestors is authorised and regulated by the Financial Conduct Authority.

 

 

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Published on: 18th October 2021