Thinking two moves ahead – how to get the best out of a fintech fundraising. Rich Woods and Emily Naylor from the fintech team at Herbert Smith Freehills provide some tips on planning a successful fundraise.
- 100% of nothing…is still nothing. If you are raising equity finance, you will have to give away some of the control of your business. Companies like Snapchat, where the founders have been able to retain outright voting control even post-IPO, are outliers.
- Plan the dilution profile for your business to the breakeven point and beyond. Protect founders and the business with a robust shareholders’ agreement addressing governance, liquidity, and decision-making. The agreements should have regard to the medium to long term (as well as the current deal) and the practicalities of running the business and getting things done.
- Your shareholders’ agreement must accommodate your future fundraising plans. A common mistake during an early fundraise is to put in place a ‘quick and dirty’ agreement which is very difficult to change – often unanimous consent is required for changes. The parties then struggle to comply with the provisions as the business grows and becomes more sophisticated.
- You may require regulatory permissions to operate – for example, to provide payment processing services, insurance products or to take deposits. This also affects your investors they will need to be approved by a regulator before they control more than a specific percentage of your equity (depending on the type of business, approval is first triggered at 10% or 20% control).
- Ensure that the circulation of any proposal for a fundraising is tightly controlled. Crowdfunding and other similar approaches are governed by strict rules on the offer to the public of securities or the opportunity to engage in investment activity.
- There are good reasons to raise money through hybrid instruments, which have characteristics of both debt and equity. For example, loans which convert into equity only when the required regulatory approvals are given can give you flexibility. Warrants can deliver the same result.
- Some investors can offer you more than just cash. Commercial partnerships may be important to the growth of your business, other investors may bring skills, experience or connections which are crucial to the success or the business. A more expensive funding round (ie a cheaper per-share valuation in cash terms) might be the better deal.
- Look after your initial shareholders and your minority investors – who may well be friends, family and employees. They will often remain crucial to the company’s success. Keep your team incentivised and avoid disgruntled employees or founders.
- Most investors will understand that a start-up will not be perfect. Fintech start-ups are small and nimble. They don’t have the enormous compliance departments which the major financial institutions rely upon. Investors should expect disclosures against the standard warranty packages during a fundraise. Make sure that these disclosures are aired early and fully – they will then simply form part of the commercial discussion, and either be ignored as a natural snagging issue in a young business, or addressed as part of the investment documentation.