Cash is king, as they say. And when times are tough, it’s even more relevant.
We know that many businesses are hurting, and funding is a tough subject right now. But some businesses can use their equity to help them survive and thrive. In these isolated times, learn how you can run a virtual raise, and how simplifying your raise legals can save you months of negotiating and closing your funding round, and also how your employee share scheme can be a big help.
Growing businesses need external funding for lots of reasons, and protecting themselves through a downturn is, unfortunately, one of them. Having funding when others don’t can make a huge difference to your medium term success. There are great support packages available from Federal and State Governments, but you may need to generate more capital from your Balance Sheet, by raising a quick round or using an employee share scheme.
So how can you save time and money by being a share registry ninja? Let’s see.
Make sure you get your fully diluted Share Registry right
Unfortunately, there are so many ways to get this wrong. And finding out in the middle of your raise that there is an error can delay your raise for weeks or longer as documents are rectified, or worse, can destroy your investor confidence altogether. These tips will help, and Cake can help you through it in the most simple way possible.
First, check if you need a share split to be able to issue new capital. This is very common for early stage funding. You need to have enough shares issued for the new investors to get their shares, in whole numbers, and you keep the right % ownership as per your plan.
When building your Share Registry for your raise, you must consider the terms of prior round shares, any convertible notes, and any options that have been issued. These all need to be included, and converted to shares as per their conversion terms so that you have what is termed your fully diluted share registry. The fully diluted share registry is the basis for the pre-money valuation too. This way your new investors know what percentage of the company they will own for their shares.
Make sure ASIC is up to date too! You don’t want investors thinking the company is sloppy or that it is hiding something, when they undertake a simple ASIC search. You must have this done first as this is a red flag and slows down or potentially even kills deals.
Communicate clearly with investors on the terms of your raise
You need to do some investment market research (like, what are investors expecting right now, should I do a priced equity round, or a convertible note?), get your registry and legal agreements ready, and then make it clear to investors via a Term Sheet. One way to look at this is, you wouldn’t buy a car without knowing exactly what model you are buying, would you? And you’d want to know the VIN, and the sellers’ details and all the technical information. Raising capital is the same, you can’t expect investors to take your offer seriously without clear terms, which can be summarised in a Term Sheet.
The Term Sheet needs to be very accurate and well planned, including company details, current and proposed share registry details, asset type, voting and dividend rights, directorships and more.
Of course, you may need to negotiate these terms later in the raise process, but at least you are in the game. Going to market without clear terms is like selling a car to someone without letting them know which year model it is.
Get your current investors on-board
Review and agree all your raise plans in advance. This agreement will take the form of a resolution whereby the relevant directors and members will approve the raise plan in a way that adheres to your constitution and shareholders agreement. You need to get this done at the start so you don’t get stuck negotiating and changing things halfway through. Plus, your investors can be your biggest supporters in your raise and may provide the first capital to help you get raise on its way (remember, often under a shareholders agreement, you will actually need to offer the shares to the existing shareholders first, under the same proposed terms, before any new investor).
Also, if you have an employee share scheme it would be a great idea to get your team on board. They will want to know how this impacts them. And this will help you to maintain the motivation and engagement towards your common goals of building value in the company.
Systemise and automate as much as you can
Capital raises can take 6 months or more. One of the key challenges in this process is navigating the myriad of legal, accounting and regulatory tasks. There are hundreds of individual communications in a typical raise.
Implementing an automated platform (….ahem Cake 😁 ) for your raise can save you weeks. Cake will handle most of the settlement and registry communications, saving you many hours of terrible administration, and speeding up your settlement.
Trust us, investors regularly sign in the wrong spot, lose emails in their inbox, can’t access your document signing software and much, much more. And then you normally have to manually update your registry, issue share certificates, and update ASIC. Cake smashes through this in super quick time! And all documents and holdings are saved for you and your investors in the Cake platform.
Using standardised terms sheet, shareholders agreements, and subscription agreements can save weeks as every investor and their lawyer don’t need to spend time learning and arguing about your terms (See Airtree Term Sheet as a great example). This can save you weeks too! If you get stuck in a back and forth on terms with lawyers, it might be time to turn to standardisation to keep things simple!
Finally, don’t forget, your current investors and team can be your best supporters in tough times! Make sure that you communicate with them, and ask for help. Use your ESOP to motivate and engage your team, and ask your investors for their support to ensure you have the runway to survive and hopefully thrive!
As always, the Cake Team is here to help. Just book in a chat.
If you liked this article, check out 7 Capital Raising Mistakes a Start-up Should Avoid or The Capital Raise Checklist – Are you ready for a raise?
This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.