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Out-Law Guide 2 min. read

Funding an internet business (checklist)

This checklist is based on UK law. It was last updated in April 2005. The following are issues to be addressed when considering possible forms of funding of a new internet business. It is likely th...

This checklist is based on UK law. It was last updated in April 2005.

The following are issues to be addressed when considering possible forms of funding of a new internet business.

Choice of entity

It is likely that the most appropriate entity will be a company with limited liability. However consideration should also be given to:

  • carrying on business as a sole trader
  • forming a partnership
  • forming a joint venture (which itself can take different forms).

The final choice will depend on the commercial objectives of the parties involved.

Initial steps

Basic initial steps or questions to consider include:

  • Has a business plan been prepared? If not, this should be done as a matter of urgency. All potential investors will require to see a comprehensive and sound business plan.
  • What will the investors want to see in the Business Plan – new entrant to market, barriers to entry, proposals for growth?
  • Will any confidential information be disclosed during negotiations with any potential investor? Has a confidentiality agreement been put in place? The potential investors will need to know what the proposed business is and it is very likely that they will acquire confidential information.
  • Is a heads of agreement/letter of intent from the potential investor appropriate to establish points of principle?

Source of funding

Consider how much money is required and the sources of finance available.

  • Business Angels
  • Venture Capital
  • Corporate Venturing
  • Debt Financing
  • Incubators
  • IPOs

A mixture of the above may be appropriate.

Conditions precedent

Identification of matters which are so fundamental that the investor(s) will require them to be pre-conditions of the funding being provided. For example:-

  • the employment of certain key individuals
  • the meeting of certain time targets
  • the securing of a particular domain name
  • any licences required in order to commence business
  • any third party consents or intellectual property licences required
  • completion of due diligence
  • long-stop date to be set for satisfaction of conditions precedent?

Equity and debt funding

A variety of important issues relate to funding:

  • How much money do you need to borrow?
  • Are you looking for equity or debt funding or a mixture of both?
  • What are the costs of arranging such finance?
  • Over what period of time are you/the company likely to be able to pay it back?
  • What sort of return do you expect on your investment?
  • Are you prepared to give an investor shares in the company and to allow it to have a degree of control over the management?
  • What percentage of shares are you prepared to allow an investor to hold?
  • How much of the day-to-day running of the company are you prepared to hand over?
  • Does the authorised share capital need to be increased to allot and issue shares to the investor?
  • Should there be different classes of shares to reflect the different interests?
  • Should the investors' shares have preferential rights, such as the ability to receive a larger dividend?
  • Should the funds be drawn down over a period of time, with additional shares being issued to the investor on each drawdown?
  • New shares to be offered to shareholders in proportion to existing shareholdings?
  • Are you prepared to charge the assets of the company?
  • Are you prepared to provide a personal guarantee to the bank? Are you prepared for the bank to take a charge over your home?
  • Can the company afford to pay back the loan, and pay any interest, if so required?
  • Does the company qualify under the DTI-sponsored Small Firms Loan Guarantee Scheme?
  • Are any incentives and/or grants available?
  • Are there any tax considerations which may affect the form that the financing needs to take?

The future

  • Are there any possible revenue streams such as advertising, sponsorship and content provision?
  • Do you want to be tied to using the same investors or do you want the ability to look elsewhere? What if the existing investors are unable to provide further finance on the terms you want?
  • How long do you intend to run the business for? Do you have any exit strategies?
  • If/when you leave the business, do you want your money (and any profits that have been made) immediately? Or are you prepared to wait for your money, or perhaps see your investment grow further although having ceased to be actively involved in the company?


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