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Investment health check: Growing your studio from seed to Series A

In the first of two articles, Sheridans' Tim Davies outlines four key steps to prepare your company for investor scrutiny

You can't help but be impressed with the efforts of the Loveshark team and its co-founder, Tara Reddy, when reading about the studio's investment journey -- which you can read in detail here. What is clear from reading the article is that having a strong product and team are key factors in attracting investors and their investment.

We wanted to build on that idea of the investment journey from a legal and commercial standpoint. In this article we have set out four practical quick fixes for studios to ensure that their companies are in the best position before speaking with investors. Taking care of these jobs early should help make sure the due diligence process goes smoothly, for both you and the investor.

Taking care of these jobs early should make sure the due diligence process goes smoothly, for both you and the investor

The computer games sector is currently booming, with PC, console and mobile engagement rising to unprecedented highs. Couple this with the fact that VCs like Galaxy Interactive are eager to invest in exciting games companies and it is clear that there are more opportunities than ever to look for equity investment.

If you are an independent studio that has taken on early stage investment and you want to move on to seed / Series A fundraising, or if you want to take steps to secure your first investment round, then this article will give you an idea of how to carry out a full health check on your share capital position to prepare yourself and your company.

Step 1: Ensure the company maintains up-to-date statutory books

Statutory books, or "stat books" as they are often called, are typically made up of a series of registers. These registers contain details of a company's administrative records, including details of:

  • Members / shareholders (detailing the number and value of the shares that each shareholder owns in the company, the dates on which they acquired / transferred those shares)
  • Company directors (and their residential addresses)
  • Company secretaries
  • Allotments of shares (including details of the amount of shares allotted, the class of shares and their value)
  • Transfers of shares (details of whether shares have been bought and sold)
  • Mortgages and charges (and any other security that the company may have provided to third parties to secure finance)
  • People with significant control over the company (PSC) or relevant legal entities who have significant control over the company (RLE) (such as a majority shareholder)
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Tim Davies

Stat books can be held in hard copy, but are more typically now kept electronically as an Excel spreadsheet or a Word document. There is a legal obligation on all companies to keep and maintain a register of members, and a company's stat books should be an evolving document updated as and when changes take place.

If your company does not have its stat books in place then the first step should be to arrange for them to be put together as soon as possible. You can do this by looking back over historical events within the company -- for example, if you recently founded a company then the stat books should include details of the founding shareholders and company directors. This process will require reviewing information regarding all of the shares which the company has issued and allotted to its members. As a minimum, your records should correctly reflect:

  • 1. The date on which founders first became members of the company (Fun fact: shareholders are not officially members of the company until their names are entered into the stat books)
  • 2. The class and nominal value of shares the member holds
  • 3. The dates on which any further share transfers / allotments took place
  • 4. The amounts paid up on the shares
  • 5. That share certificates were issued and tracking the share certificate numbers
  • 6. The dates on which shareholders ceased to be members of the company

Step 2: Cross-check Companies House records against your stat books

When investors are carrying out their due diligence the first place they will look is on Companies House. Since the stat books are a crucial source of information for investors they should show the "live" position of the company, including details of its most recent activity.

When investors are carrying out their due diligence the first place they will look is on Companies House

Companies House records provide a "snapshot" of the company as of a certain date. However, inconsistencies between the stat books and Companies House records will only cause delays and raise questions about the status of the company -- and from an investor's perspective, it is not a good look for the company to have incorrect or out-of-date filings at Companies House. Once you have your stat books in order, cross-checking your company's information at Companies House should be much easier, and quicker, and shows that you are on top the administrative side of your business.

In the event that you need to update or add any information, it is easiest to deal with this online where possible, particularly in the current circumstances, and you will need a Companies House authentication code to do so. Guidance on how to request and use a code can be found on the UK government website.

Step 3: Get your cap table up and running

A share cap table -- that's "share capitalisation table", if you want the full name -- is a great tool to keep track of current shareholdings in the company, and to figure out ownership percentages. This in turn conveys which shareholders have the ability to block or pass resolutions, and can describe specific matters which are reserved for shareholders (which we discuss a bit more at Step 4 below).

If you are preparing to take on your first round of investment, your cap table should show the current shareholdings in the company prior to the investment, and separately project the percentage ownership each investor will have once they have been issued and allotted with new shares in return for their funds -- remember that only whole numbers of shares can be issued and allotted under the laws of England and Wales, so your cap table should round share numbers up or down as appropriate to ensure that it does not contain fractional shares.

It is always worth asking your studio's current shareholders if they support the business seeking further funding

The cap table will also show the extent to which the existing shareholders' ownership percentages will be diluted. If you have or are planning to implement a share option pool you should include this in your cap table, which should ultimately show the position on a fully diluted basis -- i.e. the final shareholding position if all share options had been exercised.

Investors will often use the cap table as a basis for the investment or finance documents, so it is imperative that they are correct and that they show the correct figures. It is always helpful to have the correct, full legal names for your shareholders and to include the names of the actual investor -- where an investor is a company, include the company's full name.

Step 4: Understand what approvals are required for your investment

The company's articles of association -- usually referred to as "articles" -- are the company's rule book. The articles say what the company can or cannot do, and may describe where the company needs its shareholders to approve certain things.

To avoid any potential issues with your existing shareholders it is prudent to check if there are any matters which will require you to obtain shareholder consent before you seek external investment. If there are, then carefully consider whether the investment will trigger the need for you to ask the company's shareholders to approve it. Before starting the investment process it is always worth asking your studio's current shareholders if they support the business seeking further funding.

It is likely that, at a minimum, you will need the company's existing shareholders to waive their "pre-emption rights" -- that is the right of an existing shareholder to have first dibs over any new shares that are issued by the company. Depending on what is written in the company's articles you may need approval from a majority of those shareholders, usually a minimum of 75% unless a higher percentage threshold is provided for in the articles.

Most studios will be using "model articles", which are the default company rules that Companies House will deem to be in place when you found your company, unless you tell them otherwise. If you're not sure what you have in place then it is worth spending some time looking at your governing documents, and any other agreements, which may impact your ability to approve and proceed with your investment. The sooner you are aware of the requirements, the sooner you can prepare and show the investor that you are working to overcome these.

Getting investment ready

We hope that by following the above four steps, you will be aware of some of the hurdles that need to be addressed as you prepare for your next or first fundraise.

None of these jobs are exciting (sorry), but taking charge of these administrative chores will save you, your investor(s) and your advisor(s) a lot of time, which can instead be spent focussing on the negotiation of the transaction documents and getting your company that precious investment as quickly as possible.

Got any questions or comments? We'd love to hear from you at: Tim.Davies@sheridans.co.uk and Kamila.Bochenek@sheridans.co.uk.

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