Capital Raising - 3 tips

Some say, “you have to spend money to make money”. But what happens if you do not have it to spend?    

We know that many founders bootstrap their businesses in the early stages. Some even manage their whole entrepreneur journey without needing to raise any money from external sources.  

But have you got to the point where you may need to bring on outside investment, in addition to revenue, in order to grow?  Or you may even need capital to get that great idea of yours off the ground?  

Here are three things that all founders should think about when considering raising capital:

1. The letter of the law

The basic premise of NZ’s securities law (set out in the Financial Markets Conduct Act 2013 (FMC Act)) is that if a company is making “offers” of “securities” (i.e. shares, options etc.) to the public or any section of it(which can mean one person), then the company has to disclose a minimum level of information to those potential investors. 

The full disclosure requirements (if they apply) are significant (think prospectus / product disclosure statements, potentially $100k+ of professional fees).  

For this reason, it is helpful for founders to know there are a few disclosure exceptions that if you can fit into, the formal disclosure requirements drop away.  These include:

  • Family of a director – such as spouse, partner, children, siblings, parents, grandparents, uncles, aunts, first cousins (including any of these in a step-relationship) etc.
  • Close business associates – senior management and others who have a close professional or business relationship with the start-up or founder.
  • Eligible investor - someone who has previous experience in buying and selling securities (subject to certain requirements).  Angel investors often fall into this category.
  • Required investment activity – including those who own (or have owned in the previous two years) an investment portfolio of certain types of securities with a value of at least $1m.
  • Small offer - an offer of shares, where neither the 20 investor limit nor the $2m limit are breached (some notification requirements apply).

Key takeaway

Generally, friends are not caught by a general exemption, so to invest they should come within another disclosure exemption.

2. Control

Boards tend to manage companies, and it’s often not until companies get big enough that there is a separation between those making the day to day decisions and strategic calls.

The legislation that governs companies (aptly called the Companies Act 1993)provides that board decisions are made by majority decision (i.e. 50.01%).  However, there are a few decisions that the Act requires shareholders to decide. For the most part, shareholder decisions are also made by a majority (including appointing directors).  

There are four decisions that require a higher level of 75% or more shareholders to agree, those decisions are:

  1. revoking, replacing or amending the constitution;
  2. approving a major transaction (being any transaction the value of which comprises 50% or more of the total value of the Company’s assets (before the proposed transaction));
  3. approving an amalgamation of a company; and
  4. taking any steps to wind up a company or place a company into liquidation.

This threshold can be amended above, but cannot be reduced below, 75%.    

Founders should carefully consider how many directors are appointed to the board and also what percentage of shares will be issued to new shareholders.  Ideally, there should be an odd number of directors to reduce the potential for equality of votes and founders should retain at least 75% of the shares.

Key takeaway

75% is the magic number for control at shareholder level.

3. Shareholders’ agreements and constitutions

Bringing new shareholders on board (and possibly new directors) can mean new (and possibly opposing) views on how a business could be conducted and a company should be managed.

It is worthwhile sitting down with potential investors(particularly family!) before they invest and find out what their expectations for the company are and whether they have any views on matters such as:

  • how future capital should be raised;
  • special rights to appoint directors (if any);
  • should any matters require unanimous consent of the board?  Or unanimous consent of shareholders;
  • what happens if one shareholder wants to exit;
  • should there be a right to veto new shareholders;
  • what happens if shareholders cannot agree;
  • what happens if an individual shareholder dies;
  • what happens if a shareholder is declared bankrupt or goes into liquidation; and
  • should restraints of trade apply to shareholders.

Having these difficult discussions upfront can be invaluable in ensuring that shareholders are aligned going into their new relationship.  They can also identify any possible unresolvable differences that may mean going into business together is not a good idea.

And where matters are agreed then it is of course worthwhile recording these in a shareholders’ agreement or constitution.  Neither document has to be long or complicated, but they do prove worthwhile and avoid possible pain down the track.  

Key takeaway

Talk to your potential new investors and find out what (if anything) they would like to have a voice on or be involved in.

If you're a NZ start-up or founder needing more info on cap raising, book your free 30-minute session today.

Click here for more on the series including other topics of interest.

Author: Sarah-Jane Lawson

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