By Oliver Woolley, Envestors
As an entrepreneur you may have a growing business but perhaps would like to see it grow more quickly and be able to capitalise on additional opportunities. To achieve this you may decide to raise equity growth capital. But do you know what is involved and much this will cost?
To help set expectations, Envestors, which has raised over £100m for 200+ businesses, has created an overview of the costs of raising capital to help you budget.
Upfront costs require around £7,000-£29,000, factoring in success and/or monitoring and due diligence fees for funds. Your total spend will be £20k-£60k, depending on where the funds come from and the total raise amount.
As a percentage this spend can be as little as 5%-13% for raises above £500k or as much as 9%-24% for raises at or below £250k.
Let’s review where you will need to spend to achieve your raise.
To avoid future problems, this is an area worth spending your budget on. While we always recommend working with a lawyer specialised in early-stage investments, you’ve a choice between platform-based services, like Seedlegals, starting at £1,000 or firms like CMS, which while more expensive starting at £5,000, are a safer choice for businesses beyond the seed stage.
Selling shares in your business requires numerous legal documents. For example, a Term Sheet. This is a summary outlining the material terms of the agreement. You can create this, and your lawyer will use it as a basis for further documentation. You’ll also require a Shareholders Agreement, Subscription Agreement/Investment Agreement, Disclosure Letter, Articles of Association and Deed of Adherence (used when new investors are joining a pre-existing group).
Additionally, you’ll need a Service Agreementwhich includes employment contracts with the managers/directors, incorporating non-compete restrictions. Many investors will review employment contracts during their due diligence. It’s not requisite to launch your fundraise, but will required.
That is a lot of documentation to put together – especially if you’re just starting out. Sometimes smaller deals, under £100k will use a Letter of Agreement/Conditions of Investment Letter. These letters may be drawn up with little involvement from a lawyer. The advantage is that this process is quicker and cheaper; the disadvantage is that these documents may not incorporate proper legal protections for the investors. You may also need advice on your company’s Articles and the shareholder’s agreement (if there is one).
Tax advisory fees
The Seed and/or Enterprise Investment Scheme (S/EIS) is a major incentive for investors. However, S/EIS is complicated, and we always advise working with a third-party on your application. Starting costs range from £1,500 – £3,000.
Corporate finance advisory fees
Investment readiness means you have a clear proposition and all requisite documentation to support your raise. Some Local Enterprise Partnerships (LEPs) or Chambers of Commerce offer subsidized ‘investment readiness’ programmes. Fees range from £1,000-£10,000, or a monthly retainer.
The right amount for marketing depends on several factors, including your audience, the size of your business, your current level of awareness and what kind of investor you’re targeting.
For many, using an agency to produce a pitch deck is a smart move. We see a lot of pitch decks which make it difficult to understand what the business is and why anyone would want to invest in it.
Videos have been shown to drive engagement and may be worth considering. However, a good video can be costly. £3k is a typical starting point.
Cold-approaching investors e.g. via LinkedIn isn’t the best way to raise capital.
There are organisations, with networks of registered investors, which understand the type of deals of interest to their community. They usually charge fees for access. Some charge for investment readiness and promotion while others charge a flat fee for access.
Fees range from £200-£6,000 and depending on the service may mean you don’t need to spend on advisory fees.
Success fees are payable as a percentage of funds raised through an intermediary. Typically, 5% -7%, although some will charge much more, of the funds raised. Some brokers may also ask for options.
Due diligence fees and abort costs
These fees are often charged when working with funds. They cover the cost of conducting legal, financial and technical due diligence on your company. This can be anything from £10,000 to £25,000 and is typically taken out of the funds they invest. If you pull out of the deal, you may also be liable for these costs as an abort fee.
Post-investment monitoring fees
Most investment funds will require you to pay monitoring fees once the funds are in place. These are usually around £6,000 per annum. In some cases, you may be able to increase the amount of finance raised to cover some or all of the costs.
You can see from this why it takes money to raise money. Fundraising is complicated and takes a lot of time. However, by understanding what is involved and you can budget accordingly, get the help you need and impress potential investors.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.