From pitch deck to closed round – how to succeed with your financing

Preparation lays the foundation for a smooth process

Before contacting potential investors, you as founders should agree on what you want to achieve: What will the capital be used for? What type of investors do you want to target? Are there any specific issues that are important to you as existing owners, such as retaining control of the company or ensuring that you can implement your vision?

Many companies underestimate how important it is to have everything in order before the process begins. This is particularly important for start-ups, as investors often have limited time and quickly form an opinion about the maturity of the company. Ensure that company formalities, signed agreements and other relevant documentation are in place. Also identify the factors that are essential to the company's development and value, such as customer agreements, intellectual property rights and key personnel. These areas will be the focus of the investor's review. If possible, it is a good idea to identify and address any shortcomings before the investor begins their review of the company.

It is also important to identify at an early stage whether there are any circumstances that could affect the financing schedule, such as notification under the Foreign Direct Investment (FDI) Act, approvals from counterparties and any restructuring.

What happens after the pitch?

After a successful pitch, discussions begin on the terms of the investment. The company provides information to the investor as a basis for evaluation, valuation and further negotiations. A confidentiality agreement (also known as a CDA or NDA) should be in place before sensitive information is shared.

The parties discuss valuation, transaction structure and other essential terms – often summarised in a term sheet. A term sheet is not legally binding, but sets the framework for further negotiations. The most important issues are often negotiated at the term sheet stage – so involve advisers early in the process.

Due diligence – prepare for scrutiny

Due diligence aims to identify risks and circumstances that may affect the valuation and to verify the assumptions underlying the investment. The review may cover financial, legal, tax, commercial and technical aspects.

The scope varies depending on the company's operations and complexity and the size of the investment. Allow three to five weeks for the due diligence process, and be prepared for management to need to devote 20–30 per cent of their time during this period. For start-ups with limited resources, this can be a challenge – so plan in advance how you will handle the increased workload without losing focus on day-to-day operations.

Common findings in a due diligence review include lack of regulatory compliance (e.g. GDPR), insufficient documentation regarding ownership of essential IP, and inadequate agreements with key personnel. Deficiencies identified during the due diligence may affect the valuation or need to be addressed in the investment agreement.

Checklist for a smooth due diligence process

• Use a data room solution tailored to the process (do you need a Q&A function, separate permissions for different teams or the ability to redact documents?)

• Ensure a well-structured folder hierarchy with clear document names. Avoid duplicates.

• Make sure that formalities are in place: e.g. share register, minutes, declarations and signed agreements

• Carefully review and respond to the question list and provide explanatory comments where appropriate

• Assign responsibility for responding to questions in the Q&A

Key terms in the investment agreement and shareholders' agreement

When due diligence is complete, it is time to negotiate the investment agreement and shareholders' agreement. The investment agreement governs the terms of the investment itself, whilst the shareholders' agreement governs the period following the investment. Below are some of the most important issues addressed in the agreements:

Financial terms: It is important for you as existing owners to understand how the transaction structure and the financial terms of the investment affect you and the distribution of the surplus from a future exit. Sometimes investors want a structure that involves the issuance of special preference shares to investors. Preference shares entitle the investor to payment ahead of ordinary shareholders upon an exit. This usually means that the investor first recovers their invested capital (sometimes with a certain return) before the surplus is distributed among the other shareholders. A so-called waterfall is often used to illustrate the order in which, and the amounts to which, different shareholders are entitled upon a sale or liquidation.

Incentive programmes for founders and key personnel are also an important part of the financial terms and aim to ensure that key individuals are motivated to contribute to the company's long-term value creation.

Warranties and liability: The investor wants confirmation that certain information is correct, e.g. that the shareholder register is accurate, that the shares are freely transferable, that key agreements are valid and signed, that the company owns or has the right to use its intellectual property (IP), that there are no ongoing or threatened disputes, and that the company complies with applicable regulations (GDPR, employment law, tax, permits, etc.). Warranties typically apply for 12–24 months, with a longer period for tax warranties and certain particularly important warranties.

Board composition and influence: Key issues include how many board seats the investor receives, whether founders are entitled to a board seat if they hold a minority stake, and which major decisions require the investor's approval (e.g. new financing rounds, loans, major investments, appointment of the CEO).

Vesting: Founders and key personnel are often required to earn or vest their shares over time (typically 3–5 years). For you as founders, this means you must remain with the company for a certain period in order to fully realise the value of your ownership. If you leave the company prematurely, you may be required to sell all or part of your shares at a price below market value. This protects the investor against key personnel leaving the company shortly after the investment.

Non-compete obligations and transfer restrictions: The shareholders' agreement often contains provisions on non-compete and non-solicitation obligations that govern what founders and key personnel may and may not do during their time as shareholders and after leaving the company. Such provisions are designed to protect the company's business, customer relationships and staff.

The agreement may also contain transfer restrictions limiting the right to sell shares, as well as pre-emption rights for other shareholders in the event of a sale.

Exit strategy: An exit may take the form of a sale of the company or a stock market listing (IPO). Investors often wish to have influence over decisions regarding when and how an exit is carried out. The shareholders' agreement often contains provisions governing the exit process, as well as so-called drag-along and tag-along clauses. Drag-along means that majority shareholders can compel minority shareholders to sell their shares on the same terms, thereby facilitating a sale of the entire company. Tag-along clauses, on the other hand, give minority shareholders the right to participate in a sale on the same terms as the majority shareholders, protecting the minority against being left in the company with a new majority shareholder.

Five practical tips for your financing round

1. Prepare well in advance – having everything in order before the process begins saves time and strengthens investor confidence

2. Involve advisers early, already at the term sheet negotiation stage – this is when the most important terms are established

3. Understand the balance between capital and control – more money may mean less influence, so consider carefully what matters to you

4. Vesting, preference share and exit terms are critical – these terms have far-reaching consequences for you as founders

5. Communication is key – be transparent with investors and address identified deficiencies proactively

Concluding reflections

A successful financing round requires careful preparation, an understanding of the issues that are material to founders and existing owners, and the ability to strike a balance between the interests of existing and new investors. Consider what is most important for your company at the stage you are currently at: rapid growth, retaining control, or bringing in the right expertise through your investors?

The companies that succeed are those that enter the process well prepared and with realistic expectations of what the investor will require in connection with the investment. Engaging advisers at an early stage can be crucial for identifying important issues early and ensuring a secure and smooth process.

Would you like to discuss how best to prepare for your financing round? Please do not hesitate to get in touch to arrange a meeting where we can review your specific situation.