Raising external capital can be a minefield and financial missteps could cost you a deal. Wilson Sonsini has been helping Ascension with preparing our portfolio companies for US exit. Here’s how to keep your house in order.
Your captable is wrong – if your captable is being maintained by your part-time bookkeeper or a fractional FD, it is almost certainly wrong. Scrutinise it. If an investor knows their way around Companies House they can quickly spot errors. If a potential investor doesn’t trust in your ability to look after a captable, they are going to have really hard time trusting you to look after the IP you are building.
If your finance person is changing every 2 years, get a corporate secretary to look after your captable. Otherwise Inform Direct has good UX if you have a clean and simple cap-table.
Understand the waterfall – do you know how your preference stack plays out today under a couple of different exit scenarios? That waterfall is about to get more complicated.
If an investor is proposing a ‘2x participating liquidation preference’, make sure you know what this will mean to you and how the interests of your investors are going to be mis-aligned in future.
Build a 3-Way Financial Model: profit & loss, balance sheet, and cash flow. This is 100% going to be wrong, but that is ok. Your model is a framework for talking to investors. A VC wants to know that you understand revenue drivers, cost structures and what levers are available to you as a founder. Are you assuming coconuts or can you back them up with research and industry benchmarks? At early stages you can probably just about survive without a 3-way model, but you will need to find other ways to communicate your financial vision.
Runway, runway, runway: investors always want to know how many months of runway they are buying. Is this long enough to pivot and still prove PMF with enough time left over to raise the next round?
Master Cash Flow Management: surprise whoever is managing your cashflow and ask them on the spot if they are using the direct or indirect method. The correct answer is both. Indirect (based on your P&L) for long-term but you also want a 13 week direct forecast running continuously with any surplus cash parked in a 30 day deposit account. Speak to Round Treasury if you don’t have a deposit account.
No EMI scheme is probably better than a failed EMI – EMI is a fantastic way to motivate key people and your option pool will likely be getting a top-up. HMRC’s Employment Related Securities (ERS) online platform is not fantastic; it was developed by disgruntled Franciscan Monks and the UX has not changed in around 6 centuries. It is impossible to see what has been submitted, when upcoming deadlines are and generally get reassurance that you are compliant.
A failed EMI is a MASSIVE headache when approaching exit, M&A lawyers will give you horror stories of founders shelling out millions to keep staff happy when the tax reliefs around EMI have failed. You want someone long in the tooth (and long in professional indemnity coverage) to be managing your EMI.
If you can’t keep your captable clean make sure your ‘drag along’ clauses will convince a US buyer – when it comes to exit, the cleaner your cap-table the better; someday a buyer is going to want 100% of your company and on completion day you don’t want to be visiting care homes to wrangle signatures from your dozens of seed stage angels that you haven’t seen in 10 years.
The USA has a less developed framework for ‘drag along’ clauses and stronger minority shareholder protections. It’s important that not only your drag along clauses work in a UK context, but they are also convincing to a potential US based acquirer.