Launching Smart: What Every Tech Startup Must Know 

As you develop your tech products, services and brand recognition in the early stages, funding may become a necessity to scale up your business and help you succeed.

There are a variety of funding options available to tech startups and our banking solicitors can talk you through the funding options available which include: 

Loans  

Whilst obtaining a loan is the simplest source of funding, securing bank funding for tech startups can be a particularly challenging exercise particularly when the startup is in its embryonic stage.

Banks will require sufficient evidence, usually in the form of a detailed business plan and supporting cash flow forecast, to demonstrate that the startup will be able to pay back the loan with interest. Given the nature of startups, it can often be difficult to prove sufficient financial standing.  

Loans can instead be advanced from the startup founders themselves or even from friends and family members. If loans are obtained, we can assist with negotiating loan facility agreements and any associated security.  

Equity investment  

Issuing new shares in the company can raise funding and investment. Equity investment can be particularly advantageous from a tax perspective for investors owing to the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), encouraging potential investors to invest in small, higher-risk trading companies that may otherwise struggle to raise funding, which makes tech startups, particularly favourable investments.  

Potential sources for early-stage equity funding for tech startups often include: 

1. Business Angels – these are wealthy individuals and entrepreneurs who invest in small businesses or start-up businesses; 
2. Venture Capitalists – these are organisations who invest money in a new business that they think will grow quickly with a view to making a profit on the sale of their shares; 
3. Crowdfunding – arranged via regulated entities, a large number of people will invest and pool smaller amounts that will be invested. Crowdfunding can also sometimes be used for debt funding. 

Ordinarily, private equity investment is a later round of investment, as private equity investors traditionally only invest in mature businesses as they will require both income and capital returns from the start of their investment.   

Equity investors have the additional bonus of providing expert business and tech advice as well as offering advantageous contacts and connections.

However, it is important to note that an investment round has the effect of diluting the personal holdings of the startup founders and their level of control.  

We are well-equipped to assist you in navigating investment rounds, structuring deals and ensuring compliance.  

If you are setting up a tech startup with others, entering into a shareholders' agreement with your business partners is vital to regulate how the owners of the tech startup will conduct themselves and operate the startup.  

A shareholders' agreement often goes hand in hand with the company’s articles of association and will outline what happens if something goes wrong, such as a dispute between business partners. If a shareholder’s agreement is not in place, the business owners may have to resolve disputes through costly litigation, which ultimately could involve winding up the business.  

Examples of terms that could be included within the agreement include:  

• Exit strategies
• Key protections for business owners (to ensure that the business does not take certain key actions without their consent (e.g. large purchases, hiring or dismissing key staff members, agreeing to loan facilities, etc)
• Rights of first refusal on new shares being issued, or if an individual wishes to sell their shares in the business  
• How director appointments and dismissals will be made

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