Raising Equity Finance

1. Raising Equity Finance Howard Moss Corporate Finance Director Kingswood Corporate Finance

2. Key Questions to Ask Yourself • Is my business ready for investment? • Is Equity Funding what I need? • How do I find equity investors? • How can I get them to invest?

3. What is the most important thing in raising finance? • Property • Location Location Location • Funding • Credibility Credibility Credibility

4. In Short “The right team, with the right idea, properly presented, will get backing.” Jonathan Massing, Managing Partner, Kingswood

5. Credibility of What? • Your idea • Your Plan • You

6. How will you know whether you are credible? • Be objective – what would you look for if it was your money • Ask professional advisers • (P.S. Don’t forget to listen!)

7. Your Idea • Does it work? • Have you proved the concept or sold any! • Who else does it? • Who are your competitors • Why are you better? • USP/IP

8. Is your strategy too risky?

9. Your Plan • Production • Distribution • Marketing/Sales • Resources • Finance • Exit

10. You • Experience • Do you know what you are doing? • Skill Set • Do you know when you need help? • Financial risk • How much will you be investing?

11. Is Equity Funding What you really need? • Insufficient knowledge of funding sources • Inability to access other sources • Insufficient presentation skills • Insufficient professional advice to provide credibility • Potential to give too much equity away too soon

12. When to seek Equity Funding You need to balance several factors • Product/Service sufficiently tested • Demonstrable interest from market • Sufficiency of management • Documented plan with validation of costs and timescales • Don’t burn all of your own money • Good plan - take professional advice

13. Sources of Equity Funds • Private • High net worth individuals • Sophisticated investors • Corporate • Professional investors • Corporate venturing • Venture Capital • Regional Development Funds

14. Funding types vs Stage of Growth Market Value Time

15. Communication of Plan Financial Services and Markets Act 2000 (Financial Promotion and Promotion of Collective Investments) (Miscellaneous Amendments) Order 2005 Wealth Warning Required!

16. Wealth Warning

17. Where to find Investors • Business Angel Networks (BAN’s) • British Business Angel Association (BBAA) www.bbaa.org.uk 21 Full members, 48 Associates • Also Professional firms regulated by FSA • In Herts – Golf Club/Country pub!

18. Other Local Sources EEDA • R&D grants • Proof of Concept • About to re-launch Selective finance • Running the Gauntlet GEIF Ventures • £5m Co investment fund • Must secure at least £25k from GEIF BA • May invest • www.geifventures.co.uk

19. Process Initial contact/expression of interest Review of business plan Initial meeting to discuss investment Negotiation process Heads of Terms Due Diligence Legals Investment

20. Costs – Professional Advice • Intellectual Property protection • Business plan preparation • Tax advice • Due Diligence • Shareholders agreements • Arrangement Fees

21. Professional Fees - Examples • Kingswood • Time based £200-£300 per hour • Payment on account - £1,500- £3,000 • Success Fees – 1% debt, 2% equity, Min fee £3-5,000 • Beer & Partners • Non-refundable engagement fee £3-5,000 • Success fees – 5% • 4% share options

22. Professional Fees – More Examples • GEIF • Preliminary filter – free • Email introduction - £400 + VAT, 4% success • Presentation day - £750 + VAT, 4% success • Envestors • Time based fees • Success – 5%

23. Professional Fees – More Examples • C2 Ventures • Case by case • Upfront £500 + VAT • Success – typically 5% • Angels Den • £99 registration fee • If promising £400 to use plan template • No success fees but no other help

24. Business Valuation “Investors and Entrepreneurs assessment of value tend to differ by a factor of 10”. What is your business actually worth now? Your business will only be worth something in the future because of the investment being made now.

25. Methods of Valuation • Discounted cash flow • Goodwill + net assets • Multiplier of post tax profits • Investor return model – 40%+ • David Beer • Good idea £250K • Good idea with IP £500K • Good idea with IP & order £750K

26. Deal Structure • Equity Share - < 50% • Ratchets – earn back • Directors loans – convert to equity • Shareholders loans – conversion option • Directors’ salaries – bare minimum • Personal guarantees – may be

27. Heads of Terms Intended to give some clarity from word ‘Go’ • Outline of deal • Amount of investment - £’s • Level of shareholding - % • Timing – mile stones • Board Representation • Exit intention • Non-binding • Except – fees/Confidentiality/exclusivity

28. Confidentiality Agreements Be sensibly suspicious! • Investor background/connections/Other investments • NDAs • protect commercially sensitive information • Need to be able to action • Exclusions • Public domain, legal/regulatory disclosures, disclosure to advisors, own research • Exclusivity/Lock out Clause • Defined period, nominal consideration

29. Due Diligence Not too soon! Proportionate to level of investment –time/cost • Customer contracts • Contractual liabilities • Financial model • IP advice/confirmation of protection • Other litigation/disputes • Tax – indemnity • Compliance – H&S Findings will affect value May even kill the deal - credibility

30. Shareholder Agreement • Addresses issues of control • Protects minority shareholders • Contents • Amount and timing of investment • Incurring liabilities / making payments (Directors salaries, capital expenditure, disposal of assets, taking out loans) • Anti dilution – further funding rounds • Board representation • Exit strategy/timing • Buy out/buy back options • Drag/Tag • Transfer of shares on death • Anti competition clause • Warranties/indemnities

31. Is that all! Raising equity is not rocket science BE PREPARED AND BE REALISTIC

32. Kingswood Corporate Finance Howard Moss 07885 962353 howard.moss@kingswood.org.uk