“I’m raising investment, what are the legal documents I need to have in place?”

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Stuart Hendry

Stuart Hendry Senior Partner

MBM Commercial (MBM) has led the market for years in the world of early-stage investment deals when it comes to acting on behalf of both founders and investors. They specialise in investments, intellectual property and all things start-up and high growth related… so we decided to chat to Senior Partner, Stuart, about all things ‘legal’.


Tell us about your role…

I co-founded MBM and, despite being Senior Partner, I am still very much actively involved with client work, helping clients plan ahead for specific events such as major funding rounds.

Along with the whole team, I work closely with our Associate, Rachel. Rachel acts for both investors and investee companies in a wide variety of investment transactions including initial seed investment.


What are the first things businesses should consider when they start to raise investment?

The first thing businesses should consider is who they want investing in their company and at what valuation. We appreciate if money is tight a company cannot always be picky however, any investor could become part of your company for a long time and therefore they need to be a good fit for the company.

Prior to contacting any investor, a company should have a pitch deck as well as a detailed business plan and set of forecasts in place to back it up. These documents need to get an investor excited and should clearly set out the opportunity, the team, and your plans. These documents need to be well written, accurate and not misleading whilst “selling the sizzle” of the opportunity!


What are the key documents to have in place?

The key documents to be put in place on an investment round are:

  • Investment agreement (or shareholder and subscription agreement);
  • Disclosure letter (against warranties* granted in the investment agreement);
  • Articles of association;
  • Directors’ contracts of employment; and
  • Intellectual property transfer agreements.

* Most investors will request the directors of a company to provide warranties in favour of the investors. If the directors cannot give these warranties without qualification, a disclosure letter will be required. A disclosure letter allows the directors to disclose to the investors what the true position is with regards the subject matter of a particular warranty. To do this, the directors will need to compile a disclosure bundle. Directors can begin to gather this bundle of documents now to save time later. We would recommend directors begin to gather the following documents: – the Company’s statutory registers (making sure they’re up to date and correct!), any major customer contracts; employment contracts; details of the company’s assets, insurance policies held and intellectual property rights owned and registered.


What legal checks need to take place on me and my investors?

Both you and your investors are required to undergo an ID check, and your investors will also need to provide a bit of information regarding the origin of their investment funds. This is a very straightforward process and can be done online in a matter of minutes.

Your investors will also be required to sign a form before they invest relating to the Financial Services and Markets Act 2000, whereby they should confirm what category of investor they fall under e.g., investing as part of an angel syndicate.


What are my legal obligations to my investors post-funding?

Once the investment is complete, your investors will now be shareholders in the company, and you need to comply with the terms of the applicable investment agreement (or subscription agreement and shareholders agreement) and articles of association.

Key obligations often imposed by investors to be followed by companies and their founders post-funding include:

  1. Regular information updates to investors;
  2. Spending the investment in accordance with the agreed business plan;
  3. Following the agreed business plan and not deviating from it without investor consent;
  4. Adopting enhanced board governance rules, often as part of new non-executive directors having to join the board and holding monthly board meetings; and
  5. Helping to apply for and process any SEIS and EIS tax applications of investors.

What are some mistakes you’ve seen people make in the past? How can I avoid them?

In terms of very common mistakes, we often come across the following:

  • Failure to maintain or properly update statutory registers; and
  • Incorrect filings at Companies House.

We appreciate that costs at the start are very tight but great care should be taken with these matters because the statutory registers and Companies House filings need to be absolutely ‘spot on’ and correct as part of raising investment.

Investors will not be impressed if your ‘DIY efforts’ on these fronts of the structure of the Company and its records are incorrect and a mess – in some cases it might put them off completely. We can often fix these issues, but Companies House records will retain in perpetuity a copy of these mistakes for the public to see (and future investors and buyers). So please be warned and please also take early advice, which is not expensive, to avoid these issues.

The other common mistake by founders is to sign a Term Sheet without taking any legal advice. A Term Sheet is essentially the “who, what, when and how” setting out the principle terms such as who’s investing, how much they are investing and when and what they want from the company in return for their investment. In most cases the Term Sheet will be used as a specification document by the lawyers of the investors to produce the main investment documents. So, if you want to negotiate on key terms, then it is best to start at the point of a Term Sheet and not later. A Term Sheet is not legally binding however, an investor will often hold you to its terms as if they are binding. Please also note that the provisions on abort costs and exclusivity in a Term Sheet are normally legally binding. So please watch out for these points and take early legal advice.


What is the right time to engage a solicitor for my funding round?

It’s never too early to engage a solicitor for your future funding! We would always recommend reaching out to a solicitor as early as possible and certainly before any Heads of Terms have been agreed or signed. We would also suggest that you appoint a solicitor sooner to help make sure that your statutory books and Companies House filings are all up to date and in order.


Any final tips?

If you are going to be raising investment, please make sure you surround yourself with a quality team!

This needs to include your professional advisers, Specialist investment lawyers and specialist tax advisers who regularly advise on deals, know what they are doing and who can help add value to the process.


To find out more about how MBM can support your business growth you can contact:

Ross Byford: E: Ross.Byford@mbmcommercial.co.uk 
Stuart Hendry: E: Stuart.Hendry@mbmcommercial.co.uk