One of the most important aspects of the start-up and technology space is ensuring that your business can continue to grow and also attract additional funding as needed for continuing development and expansion. Given the uncertain and dynamic nature of technology businesses, founders cannot always simply expect the availability of traditional funding sources, nor can they necessarily expect to obtain all the funding for their projects from one single source unless they are potentially willing to give up a large majority of their upside if the project is successful.

There is very much a case of beware when looking for funding partners. As an extreme example the show the “Shark Tank” was called that for a very good reason. Those sophisticated wealthy investors are not your friend. They are shrewd calculating business owners seeking to maximise the leverage and bargaining position they have to ensure they obtain enormous returns for their investment and shift risk from them to you as much as possible. Start-ups seeking venture or private equity capital in such environments need strong advisers to help them navigate and protect them.

Therefore, it is important that founders understand the various possibilities for obtaining funding and have adaptable advisors who are able to assist them in developing mixed funding models which can help them obtain the funds needed without potentially having to lose all of their equity stake in the process.

We recently acted for a group who had been developing an app in the transport industry. The app was being developed as part of a larger business. However, upon receiving a very attractive offer for the purchase of the larger business, the purchaser did not want to take on the development aspects which was outside of their core capability. As such, the owners worked with the management team of the app to consider how they could continue to successfully build that business as an independent entity.

The app already had undergone significant development at substantial cost and there was still significant further work to be done prior to commercialisation. Many of the people that had worked on the development could still see the immense potential that the app had and approached us for assistance in negotiating and documenting a “spin-out” of the app IP into a new entity and an acquisition of that new entity.

Given the short timeframes, there was little likelihood of being able to raise external funding necessary to both make the acquisition and to fund the ongoing development and commercialisation of the IP.

Therefore, in order to make the deal work, the parties were able to agree terms and obtain funding via a mix of various funding strategies including:

• Angel investors;
• Vendor finance;
• A working capital loan with a limited recourse security package; and
• An executive and employee share and option plan to allow for development staff who believed in the project to obtain some “sweat equity” and to allow the new entity to have superior cashflow for other development and commercialisation costs by lowering its overall wage bill.

Even though the parties had a very short timeframe as a result of the impending transaction, Hillhouse Legal Partners were able to assist the new ownership group to put together all of the following aspects in very short order:

• Transfer of the relevant IP and business assets;
• Investment agreements;
• Shareholder Agreements;
• Loan Agreements, security documentation and security registrations;
• IP Licence agreements for other necessary IP;
• An employee share scheme and option plan; and
• A shareholders agreement to govern the relationship between all of the equity holders.

As a result of this work, not only were the key stakeholders able to make the acquisition, they were able to achieve it in a manner whereby they retained significant equity positions and were able to incentivise key staff with their own equity which will provide them with significant upside in the event that the project is successful.

If you are commencing a start up venture or looking at funding options to grow please get in touch. We can help.