Are You Ready for the Investment Journey? Preparing Your Business for Institutional Funding

Scaling your business and seeking institutional investment is an exciting yet challenging milestone. Unlike early-stage funding rounds, such as seed or angel investment, institutional investors require a deeper level of due diligence and a solid legal foundation. This article explores the steps founders need to take to prepare their businesses for institutional investment, ensuring they are well-positioned to secure the funding they need without compromising their long-term vision or control.

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The Shift to Institutional Investment

By the time you reach this stage, your business is likely generating income, with a proven product or service or you have passed trials and have ambitious plans for growth. Institutional investors bring substantial resources, but their involvement comes with significant scrutiny and detailed negotiations. From financial modelling to compliance and legal documentation, every aspect of your business will be under the microscope.

The key to success? Preparation. Here’s how to build an investment-ready foundation.

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1. Pre-Investment Audit: Red Flags and Readiness

Before engaging investors, conduct a comprehensive internal review to identify any red flags. Let your team resolve or have an explanation ready prior to the investors involvement. Common areas requiring attention include:

• Company filings: Ensure Companies House records are accurate and up-to-date and your cap table and share register mirrors this correctly.
• Business plans and pitch decks: Present a realistic, cohesive narrative backed by data. Evidence and back up your numbers
• Financials and valuation: Collaborate with your advisors to align projections with market expectations. Be ready to discuss competitors and issues that have arisen in the sector and market , as they will know about them
• Key contracts and agreements: Scrutinise supplier, client, and staff agreements to ensure they reflect your business’s current operations. Any disputes , failed executed documents or gaps will be identified
• Staff issues or shareholder discontent: Any one integral to your business or who has access to data can be a problem if there is a dispute or active complaint or claim. If this cant be resolved , support the position with carefully detailed paperwork and legal advice on how and when this will be addressed.

Transparency is critical. Any unresolved disputes, intellectual property issues, or regulatory risks should be addressed proactively. An organised and thorough approach reassures investors and positions you as a professional, credible founder.

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2. Essential Legal Documents: Setting the Groundwork

Institutional investors will expect a suite of legal documents to govern their relationship with your business. These are not merely formalities; they are critical to protecting your interests while accommodating the demands of investors.

Shareholders’ Agreement

• As founders decide and document the level of control willing to bestow
• Decide on exit plans for shareholders, investors and you
• Clearly define decision-making powers, voting rights, and control.
• Address long-term plans, including exit strategies and restrictive covenants to protect the business and you.
• Consider scenarios where things go wrong, such as deadlocks or founder exits. What would your Plan B be? This document ensures alignment between founders and investors, but expect it to be heavily negotiated.

Directors’ Service Agreements

• This is your employment contract which will be negotiated by the investors
• Negotiate terms to balance founder autonomy with investor oversight.
• Include provisions for fair treatment in cases of disputes or transitions. Founders often underestimate how these agreements affect their day-to-day role once institutional investors join the board.
• Protection for yourself is vital as they will secure restrictions and periods you have to remain in the business likewise you need protection regarding treatment, shareholdings, rights and unfair treatment or termination.

Subscription Agreement and Heads of Terms

• Define the terms of the investment, including share allocation, voting rights, and board representation. Make sure you are clear what exactly you are agreeing and where you wit within the business.
• Clarify the investor’s level of control and frequency of reporting.
• Dilution, exit and minimum terms are crucial to be clear on future plans and your role within the business

Intellectual Property (IP) Portfolio

• Ensure your IP is properly registered, assigned to the company, and protected.
• Resolve any third-party claims or ambiguities around ownership.
• Demonstrate commercialization, value , protection as well as ownership this is your bargaining power
• Patents and NDAs needs to be transparently covered Investors value businesses with strong IP portfolios, but any gaps could reduce valuation or even derail negotiations.

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3. Aligning Founders and Stakeholders

Investors expect founders, shareholders, and key stakeholders to present a united front. Misalignment can cause delays or even jeopardise the deal. Make sure you have engaged everyone vital to the transaction and keep them motivated and onboard.

Founders’ Control and Protection

• Define roles and responsibilities among founders.
• Agree on non-negotiables (e.g., minimum ownership thresholds or veto rights).
• Plan for post-investment scenarios, including potential dilution or exit or worse disputes.

Engagement with Staff and Shareholders

• Address concerns around drag-along and tag-along rights.
• Be transparent about what the investment means for their future.
• When are shares to be paid out, vested , how secure are they within the business and how will this impact on them. Engaged means they will move through the journey with you or it flags issues early for you to resolve . A cohesive team reassures investors that the business is primed for growth without internal friction.

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4. Negotiating from a Position of Strength

Institutional investors often come with tight deadlines and complex terms. Founders must be clear on their priorities and non-negotiables. A strong legal team can:

• Ensure key terms are fair and enforceable.
• Anticipate negotiation tactics and prepare robust counterarguments.
• Protect founders from unfair dismissal or excessive restrictions.
• Remain clear on the goal so you are not pressured or intimidated into nonsensical terms or distracted form the business

Having the right documents prepared in advance signals professionalism and increases your bargaining power.

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5. Ongoing Considerations Post-Investment

Securing funding is just the beginning. As your business scales, ensure you remain vigilant about:

• Compliance with investor reporting obligations.
• Retaining control over the strategic direction of the business.
• Protecting founder autonomy while fostering collaboration with investors.
• Taking advice as a founder to continue protecting yourself as the business grows and you may consider exits or further buyouts , keep your options open.

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Conclusion

Institutional investment is a transformative opportunity but requires careful preparation to navigate successfully. By addressing potential risks early, negotiating favourable terms, and safeguarding your interests, you can focus on scaling your business confidently.

At?A City Law Firm, we specialise in supporting founders through this critical stage, offering bespoke legal solutions tailored to your business’s needs. For more information, visit?www.acitylawfirm.com. Karen Holden MPhil (Cantab) Jacqueline Watts - emerging technologies lawyer - ?? ?? ?? #investmentready #vcfunding #scalingup #businessgrowth #legaladvice