Every founder has to deal with the legal problem of fundraising. It’s complex, highly leveraged and always involves balancing different groups. Founders want to minimise the cost, whereas investors are more concerned about legal risk.
It is no surprise, given the risk in the process is much more significant for investors than for founders. It is especially true in the UK, where SEIS/EIS compliance (a legal issue) determines whether or not an investor can reclaim half of their investment from HMRC.
So, what are the options for dealing with this issue? And what are other founders in the ecosystem doing?
The Common Approach: Using a Lawyer
The most common solution is to use a lawyer. You benefit from the full assurance of the outcome, given that lawyers are subject to stringent professional standards and required to obtain insurance when they fail to meet those standards. It means that if a lawyer messes up their work and your investors lose money, the investors can reclaim it by suing the law firm, and the law firm’s insurer will pay out the claim. For this reason, most investors insist on using a lawyer for funding rounds.
The cost varies a considerable amount. Our research suggests that lawyers often offer “business development” rates for fundraising, especially in earlier rounds. As a result, the cost of a Seed round can range anywhere from £5000 (small law firm on business development rates) to £20,000 (hourly rates from a top city firm).
Some lawyers claim to do it for less but, be careful. If a “lawyer” offers to handle your Seed round at a price of, for example, £2000, you should ask three questions: are they a qualified lawyer? Are they regulated by the SRA (Solicitors Regulation Authority)? And do they have PII (professional indemnity insurance)? If the answer to any of these three questions is “no,” we would suggest walking away. It is because if the answer to any of these three questions is “no,” the risk is not correctly dealt with for you or your investors.
Finding the Right Lawyer
It’s essential to find a real lawyer and the right lawyer. The legacy approach to doing this is asking friends, which does lead to limited choice. However, given the wide variation in the cost of different lawyers for the same funding round, a limited choice can be costly. It is because many founders will only have connections with expensive lawyers, or even none at all.
There is one modern alternative to this approach. Kula matches you and the specific circumstances of your funding round with a set of lawyers who experienced entrepreneurs have recommended for similar rounds. It will allow you to be sure of the quality, compare options and benefit from real competition in the market.
A Modern Alternative
In 2021, the market leader for fundraising is SeedLegals. They are a technology company dealing with legals for fundraising in the UK. SeedLegals provides massively reduced costs (from £1990 for a Seed round!) and quick delivery.
We have spoken to many clients of SeedLegals and heard good things in every case (especially from founders). Furthermore, SeedLegals does have insurance. To quote their website, “PI cover [which] is provided by AIG International Group UK and extends to any claim made against [the company], giving protection of up to £2 million.” However, it’s not entirely clear what liability this insurance is for. Given SeedLegals is not a law firm and not regulated by the SRA, the professional standards which allow for claims against lawyers do not apply. So it raises the question, what can you claim?
So Whose Decision Is It?
Ultimately, the investors decide whether or not a funding round goes ahead. They are ‘venturing’ money, so they are subject to the most risk. As one founder put it to us, “I wonder how my group of angels, 50-somethings with backgrounds in finance, and without a tech background, would react to a suggesting a legaltech product for a funding round.”
*Startups of London can make revenue from some of the links in this article.