Pegasus - Raising Equity Finance

General

It is important to remember that in raising equity finance you are selling shares which represent a part of your company.

Equity finance can come from a number of sources, including family and friends, business angels, venture capitalists, special equity funds and flotation.

Only around 2% of companies succeed in finding equity investment. You must have an exciting proposition with good growth prospects and a strong management team. Investors are generally looking for something beyond the concept stage.

The management team should be able to demonstrate sector experience and a track record of running a successful business.

In many cases the total funds required will be raised from a number of sources, perhaps angel funding, combined with capital or debt from specialist venture funds and even mixed with bank lending under a SFLGS.

Stages of company development and funding needs

Seed capital -	pre-start - cash required for research or to develop a prototype
Start-up -	you have researched the market but have no sales yet
Early stage -	you have generated a few sales and need cash for marketing and operations
Expansion -	you are generating revenue but need cash for new products or new markets

Business Angels

Business Angels are widely recognised as playing an important role in the provision of smaller amounts of risk capital to SMEs for seed, start up and early stage companies.

Most angels invest less than Ł100k but they provide more than just money, normally playing a hands on role in the business and bringing valuable contacts.

Pegasus Funding Resources operates its own small network of high net worth individuals or Angels, who invest in selected opportunities.

Click here to download the 'Angel Funding Datasheet

Angel Networks

There are many organisations which provide a matching service, bringing together entrepreneurs seeking funds and a network of Private Investors. The investors may group together in syndicates to fund larger deals.

Pegasus acts as an approved intermediary for many of the largest Angel Networks in the UK. The typical range of funding for one business through an Angel Network is between Ł100k and Ł2 million.

Click here to download the 'Angel Funding Datasheet

Crowdfunding

This is a recent interesting development and comes in 2 forms; equity crowdfunding and loan crowdfunding. The principle is the same in both situations, multiple small investors combine together to invest or lend money to a company. The amounts invested can be quite small, often only a few Ł100 from each investor, so the risks to a single individual are limited. This is an interesting way for start-up companies to get their first start in life. It should be noted, however, that there are issues concerning the EIS scheme with this type of funding. It is also important not to overlook one of the advantages of traditional business angel investors, which is the experience and contacts that they often bring with their investment.

Venture Capital

Venture Capitalists will usually be looking for deals of Ł2 million plus and will be looking for an exit within three to five years through trade sale or flotation. They will want a significant stake and high returns

Equity or Venture Funds

There are funds specialising in specific sectors or regions - often backed by Government agencies. These specialist funds and trusts offer investment in start up or early stage companies but they will be looking for matched funding from other investors or lenders.

Flotation or Market Listing

This is often referred to as an IPO - Initial Public Offering. By listing on one of the markets such as PLUS or AIM (Alternative Investment Market) companies can raise their profile and gain credibility whilst accessing larger capital sums. The drawbacks come with the costs involved and the associated regulation with not a huge amount of liquidity for the shares.

CVS - Corporate Venturing Scheme

The CVS was introduced to encourage larger corporate entities to invest in high risk trading businesses in return for tax concessions. The investment takes the form of a minority shareholding, typically around 20% and not more than 30%.

The tax incentives are available for corporate equity investment in the same types of companies as those qualifying under the Enterprise Investment Scheme (EIS).

Click here for the Corporate Venturing Scheme documentation.

EIS - Enterprise Investment Scheme

Some investors will want to make sure that your company qualifies for investment under the EIS scheme which offers generous income tax and capital gains tax reliefs to investors in certain companies. Broadly speaking, the business activity for which the money is being raised should be conducting a qualifying trade wholly or mainly in the UK and the gross assets of a non-group company, or aggregate gross assets of the group, must not exceed Ł15m prior to investment nor Ł16m post investment.

Income tax relief on the amount invested up to a total of Ł400k in any one tax year. Potential Capital Gains Tax (CGT) relief on disposal of shares if held for more than three years, and investment limit not exceeded, and CGT deferral on a gain from the disposal of any other asset against an EIS share subscription.

Click here for the EIS Scheme documentation.

SEIS - Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) – will be focused on smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade. The scheme will make available tax relief to investors who subscribe for shares and have a stake of less than 30 per cent in the company.

The relief will apply to investments made on or after 6 April 2012. For the first year of the new scheme, the Government will offer a capital gains tax (CGT) holiday – gains realised on the disposal of assets in 2012-13 that are invested through SEIS in the same year will be exempt from CGT.

For full details of the SEIS Scheme please follow this link.

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