Contents
If you’re a startup planning to grow in 2025, you may be thinking about taking on investors and raising capital to help finance your growth plans. So, what legal things do you need to know as a startup preparing for a capital raise?
When preparing to raise capital and attract potential investors, it’s helpful to think about your legal considerations in two broad categories:
- Getting your company structure prepared for investment
- Preparing your legal documents for investment
In this article, we’ll explore each of these aspects in detail, updating our guidance for the evolving landscape in 2025.
Company Structure
Your business structure is significant for several reasons – it can help protect shareholders against liability, ensure that your business’ intellectual property is protected and make your business far more attractive to investors. In today’s competitive investment climate, establishing robust structures is essential. For instance, it is wise to ensure that your trade mark is properly registered; for more details, see our guide on Register Your Trade Mark.
The three types of company structures that are commonly used for investment are the single company structure, the dual company structure and the ‘hybrid’ trust/company structure. Given the continuing significance of SEIS and EIS assurances to early-stage angel investors in 2025, the most advantageous structure for your business will depend greatly on your industry and funding stage.
Single Company Structure
A single company structure is the simplest to set up. It involves having one limited company which receives funds from investors in exchange for shares. In this structure, the company that receives the investment is also responsible for owning all intellectual property, engaging with customers, and employing staff.
This structure is straightforward, but it is generally less appealing to investors than a dual company structure since it offers less protection for important assets. Under a single company structure, if the company is held liable for an issue with an employee or customer, all of its assets – including intellectual property and cash reserves – could be at risk.
Dual Company Structure
A dual company structure is generally more attractive because it provides enhanced protection for investors and the company’s key assets.
Under a dual company structure, you establish a holding company (or HoldCo) which owns 100% of the shares in a subsidiary, commonly known as the operating company (OpCo). Founders and investors hold their shares in the holding company. This separation allows the holding company to secure the business’s most critical assets, such as cash and intellectual property, while the operating company handles day-to-day activities and enters into high-risk contracts with clients, staff, and suppliers.
If problems arise in the business operations – for example, if a client sues – a dual structure typically ensures that the holding company’s assets remain insulated. As explained in our article on holding company liability, clients can sue the operating company but generally cannot pursue the holding company’s vital assets.
The downside to a dual company structure is that it is more complex and costly to set up and maintain, as it requires administering two separate companies rather than one.
Hybrid Trust & Dual Company Structure
A third option is establishing a hybrid trust and dual company structure. If you’re not too familiar with this model, it’s worth reading up on how a trust works. In the hybrid structure, the set-up is very similar to the dual company structure except that the founders hold their shares in the holding company via a trust rather than directly.
This method offers two main advantages. Firstly, it provides enhanced asset protection because if an investor attempts to lodge a claim against a founder, they may only be able to claim against the founder’s trust rather than the founder personally. Secondly, founders might benefit from certain tax advantages when receiving distributions or eventually disposing of their shares. Given the evolving tax landscape in 2025, it’s especially important to get up-to-date advice. However, trust-based structures are complex and can be expensive, so it’s prudent to seek specialist legal and tax guidance before proceeding.
What Structure Is Right For My Business?
The ideal structure for your business depends on your specific circumstances, but it is most common for companies raising equity investment to adopt a dual company structure. This model not only increases investor confidence but also aligns with modern best practices for risk management and asset protection.
|
Example Angel Ventures wants to invest £600,000 in a software company, Pear Technologies, which has developed a SaaS tool based on innovative machine learning technology. Pear will be using the funds to further develop and refine its technology. Pear Technologies appears very promising to Angel Ventures, particularly as its machine learning technology is both sophisticated and difficult to replicate. However, Pear Technologies initially operated under a single company structure, with one company – Pear Tech Ltd. Angel Ventures was concerned that the technology they were investing in could be at risk if business liabilities materialised. Consequently, Angel Ventures required that Pear Technologies restructure into a dual company structure before the investment could proceed. Pear Technologies complied by renaming Pear Tech Ltd to Pear Tech Operations Ltd and creating a new parent company, Pear Tech Holdings Ltd, owned by the founders. All shares of Pear Tech Operations Ltd, as well as the intellectual property and other key assets, were transferred to Pear Tech Holdings Ltd prior to investment. Angel Ventures then invested in Pear Tech Holdings Ltd, securing the business’s vital assets while maintaining operational flexibility. |
What Documents Do I Need?
Once you have your company structure organised and investor-ready, the next step is to prepare and understand the essential legal documentation required for a capital raise.
Term Sheet
The first document typically prepared as part of a capital raise is a Term Sheet.
The Term Sheet summarises all the general terms regarding the investment and outlines the key legal documents that will eventually be drafted to finalise the investment, such as the investment agreement (usually called a Subscription Agreement) and the Shareholders Agreement. Term Sheets are generally ‘non-binding’ and serve as a basis for negotiation, allowing both parties to agree on the overall framework before the final, legally binding documentation is prepared.
Subscription Agreement
The Subscription Agreement is a legally binding contract that details the terms of the investment. It records information about both parties, the value of the investment, and the associated regulatory and operational conditions.
Typically, this agreement includes details such as:
- The amount of money being invested
- The number of shares the investor will receive
- Warranties – the promises made by both the company and the investor regarding their financial and legal positions, which each party relies upon when agreeing to the terms of the investment
Shareholders Agreement
The Shareholders Agreement is also typically executed alongside the Subscription Agreement. If your company already has an existing agreement, the new investor is usually required to ‘accede’ or join it – although amendments may be made to suit the specific terms of the Term Sheet. If no such agreement exists, a new Shareholders Agreement will be drafted for all parties.
This agreement primarily deals with the governance of the company – addressing issues such as:
- Voting rights: decisions or actions that require investor approval
- Transfer or sale of shares: the conditions under which founders or investors may sell their shares to third parties
- Anti-dilution provisions: measures to safeguard against share dilution in the event of additional share issuance
- Drag along/tag along clauses: stipulations regarding the sale of the company when a majority of shareholders decide to accept an offer, ensuring minority shareholders are treated fairly
Employee Shares Schemes
It is increasingly common for companies to establish Employee Share Schemes as a means of retaining key talent. These schemes align the interests of employees with those of the company by encouraging them to hold a stake in the business. Investors often require that such schemes be in place before finalising an investment, ensuring that the company retains the expertise necessary to drive growth.
In addition, with regulatory and tax frameworks evolving in 2025, it’s important to periodically review your company’s policies – including your conflict of interest policy and directors’ responsibilities – to ensure everything aligns with current best practices. For tailored advice, our contract review service can help verify that your legal documents reflect the latest legal standards.
Next Steps
There’s a lot to consider when gearing up to raise capital for your startup, and the landscape in 2025 is more dynamic than ever. Keeping your company structure robust and your legal documentation up-to-date not only reassures investors but also positions your business for long-term success.
As investment environments evolve, it’s advisable to stay informed about current legislation and market trends. For more comprehensive guidance on regulatory compliance and investment documentation, check out our detailed resources such as Legal Requirements for Starting a Business and our expert Company Set-Up services.
If you would like a consultation on your options going forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.
Meet some of our Startups Lawyers
Get in touch now!
We'll get back to you within 1 business day.
Top 3 Legal Mistakes
Book in a free consultation with us to discuss your legal needs.