Mastering the Art of Fundraising: Legal Insights for Founders w/ Rajiv Samani | Joelson

Rajiv Samani : 0:00

Again, it's all about being really prescribing a specific in a term sheet, so not accepting sort of standard warranties or standard consent rights, because what's standard to a founder definitely won't be standard to an investor.

Anshika Arora: 0:12

Today, we're talking all about the legalities you need to consider when fundraising with angels. We speak about the differences between angel and VC expectations, key legal documents and terms that founders should be aware of, as well as how to manage investor expectations. We're honoured to have Rajiv on the podcast, who's a corporate associate at Joelson, with experience in working on transactions and advising both private and public companies. Joelson have been the exclusive legal partners with the BAE HQ this year and have run numerous different workshops and events for founders. You may have seen Rajiv at some of the BAE events, as he's extremely passionate about working with startups, entrepreneurs and VC-backed businesses to support them as they grow.

Anshika Arora: 0:49

I'm Anshika. I'm the founder of Eternity, a CRM designed to streamline the wedding industry for couples and businesses alike, and I'm so excited to be hosting the BAE Lab podcast today, which is powered by HSBC Innovation Banking. Let's get into it. Thank you so much, Rajiv, for being on today's episode of the UK Lab podcast. I'm so excited to have you and talk about all things fundraising, specifically when it comes to the angel investing and fundraising side of things. So let's get straight into it. To start off, what would you say is the typical process when fundraising with angels and particularly particularly, how does it differ when you're speaking to angels versus VCs?

Rajiv Samani : 1:27

So, yeah, thank you, actually a really good question. To start off, the typical process that we would expect would be to prepare a term sheet. So this is something that often, depending on the kind of investment you're getting, if you're getting investment from, from an angel investor often you would prepare that term sheet and deliver it to an angel investor alongside your business plan. So your business plan is your kind of commercial proposition saying, okay, you're looking to invest in my business, this is, this is sort of our revenue, this is what we're looking to do once we get your, your money.

Rajiv Samani : 1:53

And, however, a term sheet is more sort of going into the actual value that investors get in terms of the in the business, what rights they get in relation to their investment, what number of shares they get. So, commonly with commonly with an angel investment you would normally prepare that because angels wouldn't normally have a standard form term sheet that they would expect to send to founders, whereas with VC funding often VCs as being institutional funders they have their own terms they invest on, which are not impossible to negotiate away from, but commonly quite standard. So that's really the main difference and some of the typical process starts off by showing a term sheet and I'm sure we'll go into those provisions in more detail.

Anshika Arora: 2:29

Yeah, absolutely so. I know you've spoken about the term sheet. I'd like to hear a little bit more about that, as well as what are the other legal documents that you think come into play.

Rajiv Samani : 2:37

I suppose, going on to legal documents first, it really kind of depends on the kind of investment you're doing.

Rajiv Samani : 2:42

So if you've got a valuation sorted and you're prepared to give investors equity straight away in your business. Typically you'd have the term sheet, which would be we'd agree, the key heads of terms in relation to the investment which will come on to you, and then you'd have what's called a description agreement or a letter. What that does is kind of go through the actual mechanics of how the investment works. So if you were to receive an X amount of money for X number of shares, it determines how that process follows through, that the investors receive their share certificate and then the length of the agreement really is determined by how many what's called warranties there are in the agreement. So warranties are a statement of fact that are given by a company in relation to their business. Typical one being there's been no litigation in relation to the business in the last three years. If there has been, as a company you have a right to disclose that in what's called a disclosure letter. Say, actually there was a dispute that happened a year ago. It's been resolved. Just letting you know so that no investor can sue you for breach of contract against the statement of fact, that's a warranty. So typically, if it's quite a small investment and the angel investors aren't too fussed on sort of the state of play of the business, they're just investing in you as a founder.

Rajiv Samani : 3:45

You'd have quite a short set of warranties in relation to the typical fundamental things like that you hold shares in the business. You have the capacity to enter into the agreement. So that's the kind of the typical document we'd see. It was called a subscription agreement and then, depending on the stage of the business that you're at, if you're early stage you might have what's called model articles association. You wouldn't have a shareholder's agreement if it's just yourself as the only shareholder in the business.

Rajiv Samani : 4:06

But down the line those are documents that you'd have in place. And if there was a stage where you were receiving investment from family and friends but you didn't actually have a valuation in play, often tools we see is called ASAs, advanced subscription agreements. So these are essentially investment vehicles that are used by companies where there's no fixed price yet and you're delaying that price decision down the line. But you've got an investor who wants to invest in your business regardless of the price per share at this moment. So those are kind of two different avenues, based on whether the price is set or the price isn't set.

Anshika Arora: 4:37

Amazing. I think that's so helpful and I love about how you kind of tied it in because initially you also touched upon the difference between angels and VCs. And I know that you've kind of tied it in because initially you also touched upon the difference between angels and VCs and I know there that you've said angels, there's probably more wiggle room to negotiate terms. Are there any specific terms that founders should be aware of when they're doing those negotiations with angels?

Rajiv Samani : 4:55

Definitely so, I think one of the common things we see is going into detail into a term sheet. Typically one of the things at the end of the term sheet is a list of consent rights. These are rights, rights that going forward certain actions within the company, you'll need either the angel's consent or a certain percentage of the investor's consent going forward. So to really be specific on what those are and not accept what we often see as BBCA British Venture Capital Association standard sort of reserve maths they're called because these can be quite detailed and aren't often be spokely drafted in relation to a particular company. So those are things that are definitely negotiable, especially with angel investors, because often they won't expect to have consent oversight in areas. But if you provide that within a term sheet, it's very hard to move away from that. So bespoke drafting there is important.

Rajiv Samani : 5:41

One typical one that we often see is people are often asked for by angel investors okay, can I have a preemption right, which is completely fine.

Rajiv Samani : 5:50

However, it shouldn't be a right for an investor to be able to have a blocker on any future fundraising and that shouldn't be a consent matter that you should have to grant.

Rajiv Samani : 5:59

That's quite an early stage as a business. It might be something that VCs have a right over down the line, but for an angel investment not necessarily. And then it's just really practical stuff like information rights. If you're saying you agree to give every time you have a budget amendment you provide that to angel investors, or whenever there's a change in the share capital, so you've issued shares or you've subdivided or you've done any corporate processes, showing an actual updated cap table, it's fine to agree that, but making sure you actually know that you have to do that. Another key thing is, again, it's all about being really prescriber-specific in a term sheet, so not accepting sort of standard warranties or standard consent rights, because what's standard to a founder definitely won't be standard to an investor. So being specific and I think the more work you do at that initial stage can really help reduce costs as well as reduce time for investments to complete down the line.

Amardeep Parmar: 6:51

We hope you're enjoying the episode so far. We just want to give a quick shout out to our headline partners, HSBC Innovation Banking. One of the biggest challenges for so many startups is finding the right bank to support them, Because you might start off and try to use a traditional bank, but they don't understand what you're doing. You're just talking to an AI assistant or you're talking to somebody who doesn't really understand what it is you've been trying to do. HSBC have got the team they've built out over years to make sure they understand what you're doing. They've got the deep sector expertise and they can help connect you with the right people to make your dreams come true. So if you want to learn more, check out hsbcinnovationbanking.com. 

Anshika Arora: 7:30

Yeah, absolutely. I think that's so interesting because it's not like a one size fits all between founders and all investors and it's important to really take that into account. I guess, even when they are in negotiation stages with angels, there's an element of due diligence that is expected by founders who are in that stage where they're perhaps about to start their fundraising, go through that process. Can you shine a light around what kind of due diligence is often involved when you're fundraising with angels?

Rajiv Samani : 7:54

So with angels you'd expect more of a minimal DD process than with VCs. However, there is still some good things to have in order, depending on the kind of questions you get asked by angels. So the first thing is your cap table. So if you received investment previously, whether it be from family and friends or from other investors at a pre-seed level, just having a very granular cap table that sort of shows who's received shares when, what class of shares have they received? What's the value of the business so kind of key commercial contracts is something that investors might want to see, because they want to sort of see that the value is there in the business they're investing in. They might want to see key employee contracts as well to make sure that there are adequate what we call restricted covenants in place so key employees can't run away. Or, if they do so, there's some protection for the investor and for the company and other things like IP protection.

Rajiv Samani : 8:47

So if you've claimed to say that you've got protection over a trademark or a patent actually evidencing that, so that's important to sort of have and all these things, if you keep them in even a Google Drive or a folder, no one expects you to have a big sort of software-led BDR at this stage, but it's more just to have sort of a Google Drive or a Dropbox that has that information in there. Another thing that's quite important sort of to prepare, I'd say, is sort of any any there is any litigation, as I mentioned previously, just making sure you have all documentation in relation to important matters. So say, you've engaged a law firm over a potential dispute but it's actually not gone anywhere and you think it's resolved. Just having all those documentations in one, in one email chain or sort of in a zip folder, just so you can easily access it, because down the line it might be hard to find when you've got thousands of emails, I'm sure, as you do as a founder as you know yourself.

Anshika Arora: 9:35

Yeah, absolutely, and I think one of the top tips that I found is having a data room is so good, so having folders categorized exactly what you said, but just so it's on hand, so even if you're in a meeting with an investor, you can bring, bring it up, even if you want to proactively send. I know that slightly separate from the legal side, but go to market strategy. So many founders I know recently had a pitch deck and then had a completely separate document for their go to market strategy and it's quite nice so that you can bounce off of all of them and share the relevant information because, like you said, it's no one size fits all. So you might find an investor who is very financial led, one who's very GTM led, and so it's important to have kind of all of this work done at the outside. And I guess, leading on from that, how do you think founders should balance kind of giving up board seats and giving that level of authority to angels or anyone on their cap table without giving up too much control?

Rajiv Samani : 10:29

I think that's a really good question to ask, because one thing we often find is that if angel investors ask for a board seat, obviously it's something angels do. It's less common. It's more common at VC stage. They say they do. Say you're a sole founder of a business and you agree for an angel. Say you've got three angels coming in and one of them is deploying the largest ticket, ask for a board seat. If you grant them a board seat, what you're essentially doing is there. Then there's two directors in the business, yourself and the angel and to pass any decision of the board you need a majority of the board to agree. So what's really important there is actually playing out scenarios. So if you want to do something but the angel investor who's now a director doesn't, you're at that one-one position. So it's actually it could be a real block on decision-making, unless you've specifically drafted documents to say, actually you, as the initial director, have a casting vote. So realizing that if an angel hasn't specifically asked for a board director, right, don't give it to them. And if they have another good solution is to offer them a sort of board observer, right, so you allow them to receive all the information they might want to receive as if they were a director, but they're not involved in the actual voting process per se.

Rajiv Samani : 11:32

And then again, going back to that sort of investor consent point be specific.

Rajiv Samani : 11:37

Don't just allow yourself to have a long list of consents that might sort of not be applicable to your business or be very onerous. Tailor it to the business. For example, one of the consents we often see is that you need investor director or, say, an investor's director or investor shareholder consent to hire any employee in the business. That could be quite a process that has to run quite fast to hire someone. They could be looking at other jobs and if you have to get a shareholder consent it can take time and actually affect that process happening. This is happening. So setting a threshold there. For example, investors might expect that they or an investor director might expect their approval to be required, but only over hires of an employee greater than X salary. So sort of making it tailored to the business is really important. And also, don't show your hand too fast. Allow investors to tell you what they want, rather than offering a full suite of what you think is standard consent rights or offering a board observer right right as opposed to sort of.

Anshika Arora: 12:29

Yeah, board director right as opposed to the board of zebra right important to play out situations and have the right legal team on your side. Um, so what are some of the most common mistakes that you see founders making when it comes to fundraising? Preparing legal documents, specifically with angels?

Rajiv Samani : 12:47

You structure your business correctly and you get into the right habits. So commercially minded lawyers like us at Jolson we're always happy to have a chat, sort of preliminary cost-free, just to understand how we can help someone. Don't always think that lawyers will charge I know people often do but it's important to take preliminary advice and have initial consultations to sort of see what areas you need to focus on, even if you aren't fundraising now but you are in the future.

Rajiv Samani : 13:14

So that's one thing that we see people being shy to take advice at an early stage because they've got so many other things going on. Another one that's kind of quite specific is companies that are eligible for SEIS and EIS Enterprise Investment Scheme Relief which can. Again, it's not directly. People don't think it's beneficial to a company, it's more for an investor. However, if it's a tax relief benefit for an investor, it may make an investor more likely to invest in the company, which helps you as a company.

Rajiv Samani : 13:33

So I've been to loads of talks recently and attended sort of big EIS presentations where there's an awareness around this amazing tax relief scheme that's got another 10 years at least has been extended by the government. It's got 10 more years availability, at least in the UK. It's not used as much as it should and investors are often looking for that relief. It's obviously investing in startups is risky, so it's a relief that's provided by the government on that basis, but it can really help startups receive investment that they wouldn't otherwise. So if you are EIS and SEIS eligible, take advice from a tax advisor and go down that line to make sure you can tell investors. You've got assurance from HMRC in the form of what's called an advanced assurance that we can be EIS and SEIS eligible, and then the final thing is something that we spoke about actually earlier on today and we're closing quite a big deal for a client.

Rajiv Samani : 14:21

Don't be afraid to negotiate. People often think if I negotiate with an investor, they're going to walk away. I have to invest on their standard terms, especially. This is more for VCs as well. They've got pretty standard terms at the start, but you'd be alarmed as an investor if you were met by a founder who just accepted everything that you said, because it is a two-way process, while it might be hard to sort of get everything that you want and realize that it is a negotiation and it's important to have a set of points that you actually, as long as you do feel strongly, they're sort of not aligned initially. And if you, as long as you do feel strongly, they're sort of not aligned initially and sort of discuss that with an investor, because it doesn't mean if you disagree, things are going to fall over or investors are going to walk away. It's important to to ask questions and sort of make sure you understand everything that's going on, as opposed to just sort of thinking it's not material now yeah, no, absolutely.

Anshika Arora: 15:05

And I love the second point because, especially when we were doing our fundraising round earlier this year, we definitely had some investors put in a little bit more money because we were SEIS eligible, and so it does make that difference because it's a massive incentive for them. I know loads of investors in the UK take it as a must have, not a nice to have, so that's very helpful. Thanks, Rajiv. And just before we close off, I just wanted to ask one last question around the legal side of things. I just wanted to ask one last question around the legal side of things. When it comes to aligning expectations with your investors pretty early on around follow-on rounds or exits, how do you make sure that everyone is on the same page with what's going to happen in the future from a legal perspective?

Rajiv Samani : 15:43

So you mentioned follow-on funding. So it's important to know what your documents say when they're drafted. So most documents for sort of investment agreements and articles of association they'll allow investors to have preemption rights unless you disapply them. So what that means is that if you're doing a future investment round, you're going out to third party investors, you have to actually ask your existing investor base if they want to invest in the company on the same terms as that third party, in their pro rata amount, of course. But it's not a process you can circumvent unless you get 75% of the shareholders of the company to disapply that provision. So it's knowing that you have that right or that obligation to follow in your document and not sort of ignoring it.

Rajiv Samani : 16:24

In the same way, I mentioned information rights quite a lot, because this is something we often see founders fall foul of.

Rajiv Samani : 16:30

They agree to a set of information rights in an agreement that's quite extensive, quite onerous, and they agree to that within five business days of this change they'll provide an updated forecast, updated budget stuff like that. Again, you don't want to allow a pedantic investor, although it might not be a material issue in the company, if you don't provide them with an investor report. It's about keeping those investor relations because, again, following funding is a real great source of future funding in a company. And again, it's just really important to nail down what are the things that I can consider from the basis of the agreement that's been drafted. So if there are certain things that require investor consent or director consent or a particular party's consent, making sure you note them down. So say, you're looking to hire an employee but you know there's a particular threshold of a salary that means that you have to ask them for investor consent, just knowing what that is. So you then sort of don't fall foul of those provisions.

Anshika Arora: 17:19

Thank you, Rajiv. It's been so helpful having you on. I know I've learned a lot and I'm sure every other founder listening has as well. Before we close off, you know that there's always some questions that we ask everyone who comes up to the BAE podcast, starting off with three Asians in Britain doing amazing pieces of work that you think everyone should check out?

Rajiv Samani : 17:36

So, um, the first person I'd like to shout out is an individual called Mitul Ruparelia, someone who I actually met pretty soon into being introduced to the BAE network. So he's the founder of a company called Fortius Partners and he provides really great value creation for founders. So I've actually worked across him on a few different deals now where I'm obviously handling the legal side of stuff, and he's advising founders on value creation, advising them on all kinds of things in terms of their business plan, their financials, so they happen to negotiate their commercial contracts. So we've worked really well together and I think he's providing great value in the founder space. So I'd like to shout out Mitul. And secondly, a contact of mine, Dr Nik Kotecha, who's a real business mogul and done some great stuff in the pharmaceutical space and more recently he's had his own charitable foundation and VC foundation investing in life sciences in particular. And yeah, he's doing great work in the community in Leicestershire, which is where I'm originally from. So, yeah, he's doing great work in the community in Leicestershire, which is where I'm originally from. So, yeah, he's doing great things and I think he's quite big on LinkedIn, someone I aspire to be like one day.

Rajiv Samani : 18:36

And then, finally, I think I've done a podcast before and I shouted out Amardeep.. I think it's fair that I shout out Gurvir on this one. He is the man definitely not in front of the camera but he’s obviously doing great work and keeping up great relations with loads of really big players who are contributing towards the community. So shout out to Gurvir.

Anshika Arora: 

Absolutely. Love that. Thank you. And how can people find out a bit more about you and your company?  Interesting things. 

Rajiv Samani :

So Linkedin. I am trying to post sort of a couple times a week with various sort of interesting things that I’m seeing in the legal market and also generally sort of case lay updates, events I’m attending, I’m trying to sort of be more on there but obviously through Joelson's website we've got really good services for all areas of law for founders, so you can find us there. But be more generally on LinkedIn and I've tried to use the book an appointment function. I'm not sure how well it's working yet, but sort of just drop me a line and I'll definitely come back to you.

Anshika Arora: 19:25

Perfect. This will be a great test to see whether or not that works. Again, influx of appointments coming through.How can our audience help you?

Rajiv Samani : 19:33

So I think if you're a founder and you think any of the areas we've discussed today sort of apply to you, or you're thinking of doing a fundraiser, just want a general chat about your, your business, just get in touch so then we can always have a chat, as I said, always happy to discuss sort of where you're at and so what sort of advice you might need. And if if you're a founder who knows someone else or an individual listening to this podcast and you know someone else who might need some advice, just please pass on and share. I think that's the great thing about the bae network is that everyone's willing to sort of pass information on to one another. Knowledge sharing is really key. So sort of passing this on to the members of the community who might need it would be really appreciated.

Anshika Arora: 

Absolutely. Any final words from you?

Rajiv Samani : 20:11

Really, it's just, speak to people. I think that's one thing. I mean I wouldn't have been able to form the partnership with Amar and Gurvir unless I sort of reached out to them, seeing the great work they were doing more than a year and a half ago. It's led to a partnership between my firm and them which has gone really well, and that was just from speaking out and reaching out to people. So don't be afraid to ask for help and speak to people. I think people who are doing well are always happy to help and I think, yeah, we live in a world now where people are sort of online as much as in person. So don't be afraid to ask people for advice in both those forums. Yeah, really enjoyed this. Thank you.

Anshika Arora: 20:43

Absolutely. Thank you so much for coming on. It was a pleasure to have you.

Amardeep Parmar: 20:47

Thank you for watching. Don't forget to subscribe. See you next time.

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