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CROWDFUNDING / CROWDCUBE BREAKFAST 4 February 2015

Crowdfunding / Crowdcube Breakfast - 4th Feb 2015

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CROWDFUNDING /

CROWDCUBE

BREAKFAST

4 February 2015

www.francisclark.co.uk

Chairman’s welcome

Richard Wadman

Corporate Finance, Director

www.francisclark.co.uk

Speakers

• Richard Wadman, Corporate Finance Director, Francis Clark

• Richard Warren, Investment Analyst, Crowdcube

• Dominic Ring, Corporate and Commercial Solicitor, Ashfords

www.francisclark.co.uk

Francis Clark – who are we?

• 7 regional offices: Taunton, Exeter, Torquay, Plymouth, Tavistock,

Salisbury and Truro

• UK Top 25 Firm (Accountancy Age 2014)

• 49 Partners and over 390 staff

• Identified in December 2013 by the London Stock Exchange as one of

the ‘1000 Companies to Inspire Britain’

• Largest range of specialists located in the South West

• Awarded ‘Best VAT consultancy’ at the Taxation Awards 2014

• Awarded ‘Tax Award of the Year (non global firm)’ in the British

Accountancy Awards 2012

• Awarded ‘Best Tax Practice in a Regional Firm’ at the Taxation Awards

2012

• Awarded ‘Auditor of the Year – Mid Tier’ at the national Financial

Directors’ Excellence Awards 2011

www.francisclark.co.uk

Francis Clark – who are we?

‘Top 50

Corporate

Finance Team

of the Year’ at

the 2014

British

Accountancy

Awards.

Crowdsourcing

equity/

Crowdcube

Richard Wadman – Corporate

Finance Director

www.francisclark.co.uk

Routes to Equity

• “Friends, Families and Fools”

Include related businesses?

• Networks e.g., SWAIN, OXIN

• Conduits e.g., UEC Enterprises, GAIN?

• Virtual Networks e.g., Crowdcube

• Venture capitalists and Private Equity e.g., Piper

Private Equity, Altitude Partners LLP or Longwall

Venture Partners LLP

www.francisclark.co.uk

Crowdsourcing

Three broad categories (for business)

• Equity e.g.,

• Crowdcube - http://www.crowdcube.com/

• BrewDog - http://www.brewdog.com/equityforpunks

• Debt e.g., Thin Cats - http://www.thincats.com/ Funding Circle

https://www.fundingcircle.com/ or

• ‘Peer to Peer’ e.g., http://www.folk-folk.com/

• Rewards e.g., Kickstarter - http://www.kickstarter.com/ or

Crowdfunder http://www.crowdfunder.co.uk/

http://www.francisclark.co.uk/news-views/blog/crowd-funding-born-in-the-usa/

And many more..

www.francisclark.co.uk

Crowdcube..

Crowdcube – not just equity..

“Eden Project crowdfunding raises £1.5m in 20

hours - The charity sold £500 bonds in 20 hours in

return for 6% interest a year”

Richard Warren

Investment Analyst

@rich_crowdcube

Crowdcube is the world’s first and leading investment crowdfunding

platform giving entrepreneurs a new way to raise investment

Fully authorised and regulated by the Financial Conduct Authority

What is Crowdcube?

Case studies

Success so far

£55 millionfunded so far…

£500,000largest single investment

+125,000members

190

£2 millionbiggest deal

£3,000average investment

Successfully

funded deals

£300,000average deal

Stage of Growth

By Category

Number of Users – 2011 - 2014

0

20,000

40,000

60,000

80,000

100,000

120,000

201

1,

1

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49

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2

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8

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11

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14

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201

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201

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43

201

4,

46

201

4,

49

Users on Crowdcube

What do our investors look for in a business?Research undertaken by LSE & Bath University, 2014.

Our results show that the quality of the founders is the most

important factor that investors look for in a venture.

Demonstrated leadership and business ability

Relevant industry experience

Previous start up or entrepreneurial experience

Can the team execute the plans & deliver an exit (££££)?

The Founder

Product or idea

Product factors ranked second aligning with the

work of Muzyka et al. (1996) and Riquelme &

Rickards (1992), who both found this was the

case for venture capitalists.

Demonstrated market acceptance / traction

Product is proprietary or can otherwise be

protected

Product developed to point of functioning

prototype

Market

Market factors ranked third in our findings, it is

important to demonstrate that the problem you’re

solving is actually a problem worth solving!

Reduced threat of competition / barriers to entry

may be difficult for competition

The target market has a significant growth rate,

it is certainly not a declining market

Product or idea has demonstrated market

acceptance (customers, sales, testimonials)

Financial calibre and exit strategy

The financial calibre is naturally vital to any

venture however the team, idea & market are

more important as ultimately these aspects

sustain the financial calibre of a business.

Investors want a clear exit strategy for their

investment to be made liquid

Ideally within 5 years

Ideally at a 10x return

The proposed exit strategy is important and its

vital that you include relevant examples were

possible.

Most popular:

Company share buy back

Company sale

IPO

A series of dividend payments

Financial calibre and exit strategy

Thanks!

Richard WarremInvestment Analyst

@rich_crowdcube

CROWDFUNDINGDominic Ring

Ashfords LLP

4 February 2015

Crowdfunding | 4 February 2015 28

David HeardPartner

[email protected]

01752 526004

Key Contacts

Dominic RingSolicitor

[email protected]

01752 526030

Crowdfunding | 4 February 2015 29

1. Crowdcube & Ashfords

• Ashfords integral in pre-authorisation model and obtaining FCA

authorisation on 1 February 2013;

• Legal advisor to Crowdcube – corporate and regulatory;

• Recommended legal advisors for investee companies that

successfully pitch through Crowdcube;

• Advised over 100 companies;

• Advise on start ups, growth companies and later stage funding.

Crowdfunding | 4 February 2015 30

2. Legal Steps – Pre Pitch

& Documentation

• Content of pitch must be fair, clear and not misleading and give details of

share rights and constitutional documents;

• Prior to pitching:

– Check existing constitutional documents;

– Check consents required.

• Waive pre-emption on issue from all existing shareholders;

• Board resolution to issue the shares;

• Shareholder resolution to adopt new Articles of Association, sub-divide the

nominal value of the shares and grant directors with authority to allot new

shares.

Crowdfunding | 4 February 2015 31

3. Legal Steps – Articles

• Articles of Association:

– Crowdcube has template Articles of Association;

– Drafted by Ashfords;

– Specifically designed for crowdfunding;

– Include two classes of shares (A: voting, and B: non-voting) – A shares for significant investors;

– Pre-emption on issue and pre emption on transfer – but only for A Shareholders;

– Drag along, tag along, board representation and electronic communication provisions.

– Where investee company has its own Articles – must work for crowdfunding i.e. equal dividend rights, no restrictive covenants, no subordinated rights, equal rights on an exit, drag along etc.

Crowdfunding | 4 February 2015 32

4. Legal Steps –

Shareholders’ Agreement• Shareholders’ Agreements:

– Normal for VC/Private Equity investment – but not recommended for crowdfunding due to practical implications of obtaining signatures, and issue of unanimity for amendments with significant number of shareholders;

– Existing shareholders’ agreements usually need amending or varying –likely with unanimous consent – pre-pitch consideration;

– Can be drafted to bind certain groups of shareholders only e.g. founders if want to retain in place due to investor concerns or keep matters private;

– Be careful of provisions restricting issues/transfers to persons signing a deed of adherence.

Crowdfunding | 4 February 2015 33

5. Other Issues

• Share numbers - £10 investments, valuations, rounding/share price.

• EIS/SEIS – get tax advice!!!

• Employment Related Securities

• Share Option Schemes – fully diluted basis calculations

• Ongoing compliance – accounts and filings

• Corporate Secretarial

Investment

ready… for

equity (from

the crowd)

Richard Wadman – Corporate

Finance Director

www.francisclark.co.uk

Investment ready

www.francisclark.co.uk

The Readiness Process

• When, why and what funding is needed

• Communicating the business proposition -

Business plan and projections

• Viable plan and credible management

• Building the relationship

www.francisclark.co.uk

The Business Plan – A Guide

• Executive summary

• The Business –history and present: Where you are now, including

historic financials, ownership, awards, accreditations etc.

• The market and the opportunity

• Future strategy/ plans/ risks

• Operations (changes + practicalities)

• Financial – summary of projections

• Finance required

• The team

• Environment, Equal Opp and Local Economy etc - Depending on the

type of finance sought may have to consider these issues

The opportunity and how you

will exploit it. Why you will

succeed.

Financial implications

and finance required.

www.francisclark.co.uk

Projections – “How to”

• Excel and/ or Sage Winforecast (other programmes)

• Approach

• Annual P&L to Monthly P&L

• Cash flow assumptions

• Capital expenditure (profile)

• Other non-P&L items e.g., loans

• Opening balances

www.francisclark.co.uk

Investment ready – general housekeeping

• Compliance and Legal

- Licences / contracts/ legal title?

- IPR ownership in the company?

- Statutory Accounts/management accounts

- VAT, PAYE/NI, Books and records in order?

www.francisclark.co.uk

Requirements: Equity

• Exit route and returns to the investor

• Investors expertise vs. loss of

independence?

• Be prepared to discuss valuation

• Emotional!

• Be aware of FSMA regulations

• SEIS/ EIS

www.francisclark.co.uk

Why are SEIS and EIS important?

Important to the Investor

• De-risks an investment

• Improves ROI

Important to you

• As above

“Businesses raised £1,017

million through EIS in the

year to 31 March 2012, up

from £545 million raised in

2010-11”

“More than 2,000

companies have raised

around £2 billion in

equity cash from

investors, according to

HM Revenue &

Customs (HMRC),

which monitors SEIS.”

www.francisclark.co.uk

Enterprise Investment Scheme

• Rate of income tax relief – 30% up to maximum per investor of

£1m per year

• Capital Gains tax relief – Hold Over relief. Exemption for gains

on EIS investment if income tax claimed

• Mandatory investment period – 3 years

• Qualifying investment

• Cash for Ordinary shares in unlisted company

• < 250 employees

• Net Assets < £15 million

• Carrying out permitted activity

• Not controlled by another company

www.francisclark.co.uk

Seed Enterprise Investment Scheme

• Rate of income tax relief – 50% up to maximum per investor of

£100k per year

• Capital Gains tax relief – 50% relief on capital gains realised on

asset disposals used to make SEIS investment. Exemption for

gains on SEIS investment if tax relief income tax relief claimed

• Mandatory investment period – 3 years

• Qualifying investment

• Cash for ordinary shares in unlisted company

• < 25 employees

• Net Assets < £200k

• Carrying out permitted activity

• Not controlled by another company

• Trade < 2 years old

www.francisclark.co.uk

SEIS/ EIS Qualifying activities

Trade carried on on a commercial basis with a view to profit

Not permitted activities include:

• Dealing in land, shares and other financial instruments

• Banking and other financial activities

• Dealing in goods, other than ordinary retail or wholesale activity

• Letting or leasing assets on hire

• Legal and accountancy services

www.francisclark.co.uk

SEIS/ EIS: Practicalities – pre investment

Get HMRC clearance re “permitted activities”

Non-employees (Directors deemed not be employees)

State aid – interaction with grants

Forms/ paperwork to HMRC within set deadlines

Amount raised - limits

www.francisclark.co.uk

SEIS/ EIS: Practicalities – post investment

Maintain qualifying company status for 3 years

• Holding Company

• Control of all subsidiaries

• Permitted activity

Investor returns and control – care

www.francisclark.co.uk

Investor Ready - Conclusions

• Appropriate funding /

understand the funder

• Business Case

• Plan B?

• Know the ‘deal breakers’ – due

diligence

• Build in extra time

www.francisclark.co.uk

Business support

Growth Accelerator

- Mentoring / 7 days coaching

- Companies with 1-4 employees – £600 plus £700 VAT

- Companies with 5-49 employees – £1500 plus £700 VAT

- Companies with 50-250 – employees - £3000 plus £700 VAT

- Leadership (subsidised assistance with projections for example, £2k per member of management team)

Growth vouchers

- 50% subsidy up to £2k for advice on:

- Managing cashflow, late payments and negotiating finance

- Developing skills and taking on staff

- Improving Leadership and Management

- Marketing, attracting and keeping customers

- Making the most of digital technology

Get Set for Growth

www.francisclark.co.uk

Upcoming events

• “Equity for SMEs – An investors perspective” on 11 February

2015

• “Secured non-bank lending” on 11 March 2015

• Finance in South West (Exeter Racecourse) – 25 February 2015

• Finance in Cornwall (Newquay Cinema) – 12 May 2015

www.francisclark.co.uk

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