At Redfern Legal we help clients navigate the challenges of securing funding and negotiating the terms of investment. We also advise investors on the nuances of funding high-growth companies. Clients of Redfern Legal automatically gain access to our ecosystem of founders, executive talent, angels and VC firms free of charge.
We recently posted an article where we interviewed two Venture Capitalist experts to find out how they go about spotting a potential unicorn business to invest in which was hugely insightful and touched upon many key topics such as key characteristics and elements that investors look for when choosing an investment, which sectors they focus on, how they use their network to find investments, cold calling, the process of securing a deal, red flags they look out for, and their best advice to a business looking for funding.
We then delved a bit deeper into the ins and outs of securing investment with one of the in interviewees, Tom Britton, Co-founder of SyndicateRoom, a UK VC firm that provides a uniquely data-driven approach to investing in startups.
Read on for some key takeaways from our follow-up discussion with Tom Britton.
Q) Broadly speaking, how much equity do you tend to require in seed/series rounds ? When is it more appropriate to take a majority vs. minority stake?
A) Minority stake at seed. We’re investing £150k into rounds ranging from 500k -3m on valuations of £1m to £16m
Q) How much equity do you like to see founders and/or early investors retain?
A) I want the founders to maintain a majority of the business at seed and series A, and it would be great if they had at least close to 50% at B.
Q) What is your view on founders and/or early investors retaining superior voting rights for their shares? How much voting power is too much in your view?
A) I don’t think founders and early investors should retain superior voting rights, they are shareholders as much as the rest of investors so should have a weighting equal to their shareholding, no more.
Q) What do you watch out for in negotiating voting and dividend rights in your share class? Does your calculus change if the deal is syndicated and/or there are other investors participating in the same share class?
A) We can’t adjust our terms, however, if we see another investor asking for too much we will call it out.
Q) In terms of syndicated deals, how big is too big? What is the usual composition of investors you are comfortable coming along for the ride?
A) All of our deals are syndicated. In earlier rounds it may be a handful of angels and ourselves. In some of the larger rounds it will be angels, ourselves, and another early fund or two. Having a good group of backers is useful particularly when it comes to follow on rounds.
Q) Broadly speaking, what types of board decisions/actions do you insist on being reserved for the shareholders? Do all share classes have an equal say in making those decisions or would one class have superior rights an ideal scenario?
A) Board decisions are meant for the board. Those decisions that require shareholder votes will go to vote and all shares should vote. Those things that require votes need to be mapped out before an investment so that the investor knows what they are and what the threshold to pass or fail is. These will generally include the issuing of shares (for new funding rounds) amongst others.
Q) How do you assess share incentive schemes in the context of making an investment? How is the burden of dilution best spread among share classes? What is the pace and level of vesting that you prefer to opt for and when is appropriate to accelerate vesting? How do you account for the possibility of departing founders whether as Good or Bad leavers? When is it appropriate to incentivise with rachets?
A) I prefer employee options to vest on a 4-year period as I want to see that early team stay and grow with the business. Those who aren’t cutting it should be let go quickly and with a 4-year vesting period they will have a smaller amount of their options vest and more go back into the pool for the next hires.
Q) What are the important things to keep in mind in terms of pre-emption rights (on both new issues and transfers) as an investor? Should the pre-emption rights apply to all classes in the same way? Are you comfortable with partial pre-emptions and who should get them?
A) Pre-emption should apply to all share classes in the same way. It puts the emphasis on the entrepreneur to select their investors well.
Q) What are your start and end points in terms of drag along/tag along/bring along provisions?
A) We follow the angels lead on this, as a passive fund, if the angel we came in with thinks it’s the right time to get out then we get out.
Whether you’re an investor or a business looking for funding, we hope you found these insights from Tom Britton useful.
If you think VC funding is the way forward for your business, then the next step is to get in touch with the corporate team here at Redfern Legal as we can assist and advise you with the entire process.
We are a London-based law firm that specialises in all aspects of Business Law and works with clients from all over the globe. As well as assisting your business with the process of securing funding, we are also experts in all areas of Corporate and Commercial Law and can assist you with all legal requirements in relation to your business.
So, if you are thinking about merging your business, buying or selling a business, looking to raise venture capital or other financing or invest in a business, qualifying for EIS/SEIS assurance, restructuring your company’s shares, incentivising your management team with share options or other schemes, or have any other general legal matters in mind at all then let’s have a chat!
Email us at info@redfernlegal.com to arrange an informal chat in the first instance to see how we may be able to help your business move forward this year and beyond.
