Q?Can I restrict who they sell the shares to?

No. You could try offering shares with restrictive conditions (for example, a requirement that they have to be sold back to internal shareholders), but venture capital companies would almost certainly walk away from the deal. Why should they tie their hands in advance? And anyway, what guarantee is there that the internal shareholders will have the money to buy when they want to sell?

Q?Will a venture capital firm be looking for all its gain on exit, or will it want income in the meantime?

It will depend on the firm. All will expect most of their gain on exit, but many will want dividends in the meantime too. Make sure you know what they are looking for before you sign up to anything.

Q?I was involved in the past with a company which went into receivership. Will this count against me?

Possibly. It will depend on why the company went into receivership, when, to what extent you were responsible, and what you have been doing since. If the receivership was more than 10 years ago, and either you were only peripherally involved, or you have since rebuilt your fortunes, you probably do not need to worry about it. Be prepared to talk about it in terms of a learning experience. If it was more recent you will have to work harder to convince investors that you are worth backing.

Q?What sort of information do I have to provide when I go looking for venture capital?

You will need to put together a business plan, and you must take advice on doing it. At the very least you will have to provide:

  • an explanation of who you are (including your age, qualifications, background, etc)
  • an explanation of what your business does and where you plan to take it
  • sales and profits figures as far back as you can go
  • a balance sheet showing assets and liabilities
  • a detailed three year sales and profits projection
  • a detailed cash flow projection over the same three year period
  • an idea of what you expect to do in the following two years
  • details of your management team (if any)

Business plans, particularly those designed for investment institutions, are becoming sophisticated documents.  Be prepared to spend time and trouble on yours. This is your selling document, and you will only get one chance at presenting it. Venture capitalists are swamped with applications for money, most of them pretty iffy, and it is very unlikely that they will be willing to look at yours a second time

Q?What is mezzanine finance?

Basically it is second (or subsequent) stage financing. The first stage is when you invite in your first outside investors: they are the ones who take the really hairy risks. By the time that you get to second-stage financing you should have an established track record and management team, and you should be able to get the money on easier terms.

Mezzanine finance may come in the shape of equity, but is more normally debt, or a debt and equity package. Some banks specialise in arranging it. Take advice if you think you will need it.

Q?Will I be able to go back to different people for more money in the future?

Certainly – provided that you have not tied yourself up into some sort of exclusive deal, which would be most unwise.

Q?Will I be able to go back to the same people for more money in the future?

That depends on why and when. If you need more money in the short run (ie within two years), because you miscalculated how much you would need, or the returns are coming in more slowly than you anticipated, or something else has gone wrong, the answer is probably no. Both investing institutions and business angels are fairly hard-headed, and you are most unlikely to be able to tempt them into throwing good money after bad. But if you need more money in the medium-term, to expand production, or move into new markets, the answer might well be yes.

Q?What happens if things go wrong – for example, if they invest, but I subsequently find I cannot comply with the agreed terms?

Start talking. Venture capitalists and business angels know that some of their investments will give them problems. What they really do not like is being kept in the dark. So tell them what is happening, and what you propose to do about it.

If they are not happy with your explanations and proposals, there will be very little that minority shareholders can actually do – apart from dumping the shares for the best price they can get, and passing the word around. (That could blight your attempts to raise new capital for years to come, so do not take it lightly.) If your outside investors hold debt, however, they may (depending on the terms), be able to force you to repay it. Whether they do it will depend, at least to some extent, on whether they think you are reliable and trustworthy, and are prepared to back your efforts to turn the situation around.

Q?How can I best plan to control the impact a future sale is likely to have on the business?

In a perfect world you, or your advisers, would arrange to have other investors willing and anxious to buy up the shares your venture capitalists want to sell. That way your venture capitalists would be happy (because they had obtained a good price for their shares), your other shareholders would be happy (because they had received a good valuation on their shares), and the business could proceed unencumbered by disgruntled shareholders (unable to get out at a reasonable price), or alternatively by disgruntled ex-shareholders (sitting on lower profits than they were expecting to obtain). The world is rarely perfect, but there are things you can do to push it in the right direction:

  • Do what you can to make sure that your figures – sales, profits, profit margin and dividends – are moving in the right direction.
  • Build up a relationship with your outside shareholders, and try to develop a ‘feel’ for their intentions. Do not hold it against them if they are planning to sell your shares – they will not be as committed as you are, but their help will have been worth having while you had it. When they decide to sell, you want to be the first to hear about it.
  • Maintain your relationship with intermediaries and, if possible, develop a relationship with other potential investors.
Q?How long would they want to hold the investment?

Venture capitalists will often expect to sell their shares – via the so-called ‘exit route’ of selling the company or arranging a flotation (a listing on a market such as the Stock Exchange) – after as little as three years.

Business angels by contrast will probably be thinking longer-term – say five years, in the first instance. If things are going badly they may try and bail out sooner; if things are going well, they will probably be content to hold their investment for somewhat longer.

Q?Would I have to give them a seat on the board?

Perhaps. Some venture capital firms will take the view that managing the business is your affair, and will simply judge you by the end results. Others would prefer to know which way you are thinking, so that if they see you doing something they know has proved disastrous elsewhere, they can at least suggest a rethink. Most will want the right to appoint ‘their’ director to the board if things are not going well for the business.

Most business angels will want a seat on the board, and should prove to be level-headed and sensible members of it.

Q?How much say would they want in the management of the business?

As a general rule you can assume that venture capitalists will want to know what is going on, but will not usually want to be involved day-to-day, provided they are getting plenty of information. But business angels will want to get involved in day-to-day management in any event. However, there are going to be as many variations on that rule as there are funders involved – which is another reason why it will pay you to consult an intermediary, who knows what the funders want, rather than trying to go to them directly.

Q?What rights would they get with the shares?

This is up for negotiation, too. As a minimum, however: assuming that they are buying ordinary shares — and most venture capitalists and business angels will be unwilling to accept anything less — then they will get the voting rights attributable to those shares. These usually include the right to vote on acceptance (or rejection) of the company’s annual accounts, the right to vote on the directors’ remuneration, and the right to vote on the appointment and dismissal of directors.

Holders of at least 5 per cent of the voting also have the right to force the directors to call a general meeting (a meeting of the shareholders), or to call it themselves at the company’s expense if the directors refuse to do it within a reasonable time. Holders of at least 25 per cent of the ordinary shares can block special resolutions, and a special resolution is required to change the articles of association.

Minority shareholders cannot of course block the majority in accepting the accounts, agreeing the directors’ remuneration or appointing new directors. Nevertheless, taking on outside shareholders is not a matter to be undertaken lightly. You, and the other directors of the company, have a fiduciary duty to act in good faith to promote the success of the company, and if you take on outside shareholders they will be checking to make sure you do it.

Outside shareholders will also be entitled to their share of whatever dividends are being paid, and to their share of the assets left (if any), if the company has to be wound up. Many venture capitalists will ask for preference shares in addition to ordinary shares, which give them a guaranteed percentage of the amount they have invested, or of the company’s profits, as dividend each year – a “first call” on the profits before any dividend is paid to ordinary shareholders. This right is usually cumulative – that is, if the preferential dividend is not paid in one year it is carried forward and added to the dividend payable in subsequent years

Q?What sort of a stake would they want to take?

This is up for negotiation. In broad terms, few venture capitalists would want more than a 30 per cent stake. Many will be restricted by the terms on which they are allowed to invest, to holding no more than 10-20 per cent of the shares in any one business. The question then becomes, whether a 10-20 per cent stake in your business is worth the money you would like them to provide.

A business angel might be willing to take a higher stake, if the growth prospects are sufficiently enticing. But you would have to be very certain you could work with him (or her), before you gave him a stake of more than 30 per cent

Q?Would a venture capitalist (or a business angel) be looking for an all-share deal, or would they be willing to put up debt capital as well?

Some venture capitalists are certainly willing to think in terms of putting up both equity and debt capital, though they would be unlikely to consider a deal for debt alone. That is what banks are for. If you do want a debt and equity package, however, you would do better to get your own intermediary to put it together: after all, you are ‘buying’ this money, and you do not want to tie yourself in too tightly to any one supplier.

Q?What is the difference between a venture capitalist and a business angel?

Both provide equity capital for investment in new or expanding companies. But generally speaking, a venture capitalist is an investing institution – for example, an insurance company, a pension fund or another fund management organisation. Because they are investing money on behalf of other people, they are likely to have strict criteria – for example, on the type of business in which they are prepared to invest, the rate of return they expect, and so on.

Business angels are private individuals who are looking to invest a lump sum on their own behalf, very often in a business to which they can make a non-monetary contribution too – for example, in helping with marketing or other management skills. Their financial resources will be more limited than those of the venture capitalists, but their approach probably more flexible.

Q?And the maximum?

In practice, assume a maximum of £50m, unless the circumstances are really exceptional – for example, where part of a large, established business is being sold off to its management.

Q?What is the minimum they would be prepared to invest?

It can take almost as much time and effort to size up a business looking for £50,000 as it does to size up one looking for £1m. Most venture capitalists are unwilling even to look at any business wanting less than £500,000. A business angel will often be prepared to invest lower amounts in the business.

Q?How do I find people who would be prepared to put venture capital into my business?

You could spend a very long time going nowhere if you try to tackle this one on your own. Your best bet is to tap into an existing network of venture capital providers, by way of a lawyer or accountant who specialises in providing services to SMEs (small to medium-sized enterprises), or possibly by way of your local Business Link.

There are also brokers who claim to offer introductions to venture capital sources. Their services are variable in quality and can prove expensive.

The intermediary, whoever they are, should be able to guide you on incorporating your business (ie making it a company), if it is not one already. This is an essential first step. They should then be able to give you a good idea of what individual venture capital providers are looking for, and what they are likely to offer in return. They may be able to steer you towards the providers most likely to be interested in your project, and they may be willing to advise on your presentation, to maximise your chances of success.

Of course, none of this will come cheap, so you need to set a budget for the costs of raising capital. Lawyers and accountants will normally work on a fee per hour worked. Brokers will look to receiving a percentage of the sum raised. Some may also expect a bonus payment for success in raising capital for you. Bear in mind that payment may be due whether or not you actually succeed in raising money. At a very rough estimate, a successful small company in a conventional business would probably have to pay between £10,000 and £25,000 in fees, to raise £250,000