Navigating the Top-Up Round: A Guide to Additional Funding
A top-up round, also known as a follow-on round or extension round, is a type of equity fundraising round that occurs after the initial valued investment round at any given stage of a company's funding journey.
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A top-up round, also known as a follow-on round or extension round, is a type of equity fundraising round that occurs after the initial valued investment round at any given stage of a company's funding journey. In a top-up round, existing investors or new investors provide additional capital to the company.

Top-up rounds are often used by startups to secure extra funding to fuel further growth or to bridge the gap between larger funding rounds. These rounds can be necessary when a company needs additional capital to execute its business plan or to capitalise on emerging opportunities but does not want to undergo a full-fledged fundraising process.

In a top-up round, the terms of the investment may be similar to those of the previous round, or they may be negotiated separately. Existing investors may choose to participate to maintain or increase their ownership in the company, while new investors may see the opportunity to invest in a company that has already demonstrated promise and potential.

Overall, top-up rounds provide a flexible way for startups to access additional capital without going through the entire process of a new fundraising round, and they can be a valuable tool for companies looking to sustain their growth trajectory.

When carrying out a top-up round, there are some important considerations to bear in mind.

  • Dilution and Ownership: Understand how the top-up round will impact the ownership structure of your company and the dilution it may cause for existing shareholders, including founders and early investors. Keeping an updated cap table is crucial during this process. As a founder, consider how the dilution from the top-up round affects your ownership percentage. If your ownership falls below 30%, you may need to consider additional incentives, such as Enterprise Management Incentives (EMI) or other schemes, to boost your stake or mitigate heavy dilution. If you hold more than 30%, growth shares might be worth exploring to maintain control and align with the company's long-term goals.
  • Tax Implications: Tax implications can impact investors' ability to claim benefits or reliefs, such as those associated with startup investment schemes. The UK has specific schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which offer significant tax reliefs for investors. It's essential to ensure that the structure of the top-up round doesn't disqualify your company from these schemes and that the fundraising process complies with tax legislation and regulations. This also includes checking that employee share schemes like EMI remain tax-efficient after the top-up round.
  • Valuation: Determine whether this round is an extension of the previous one or if it will be conducted at a higher valuation. If the top-up round is an extension, the valuation remains the same, which might require investor consent due to the dilution for existing investors. If it is at a higher valuation, existing preference rights may need to be adjusted, and a new share class might be created to reflect the increased share price and valuation.
  • Shareholder Agreement: Review your existing shareholders or investments agreement to ensure compliance with the existing terms and identify any necessary amendments to accommodate the new investment. A top up round will involve pre-emption rights and other investor rights.
  • Regulatory Compliance: Ensure that the top-up round follows applicable regulations, including financial governing bodies' requirements, and that proper disclosures are made. If you're marketing the round to a broader audience, specific guidelines for financial promotions may need to be followed.
  • Corporate Governance: Assess how the top-up round could alter your corporate governance structure, including board composition, voting rights, and consent matters. Communicate any changes to existing investors to ensure alignment and avoid misunderstandings.
  • Employee Incentives: A top-up round might impact employee incentive schemes, particularly Enterprise Management Incentives (EMI). Be aware that certain events can disqualify an EMI scheme, such as a significant change of control or other ownership structure alterations. Any such changes in the top-up round could disqualify EMI options and potentially lead to unfavourable tax consequences for employees. Review the potential risks with a legal advisor (speak to us!) to ensure compliance with EMI legislation and to minimise disruption to existing employee incentive programs.
  • Legal Documentation: Legal support is crucial for drafting and negotiating top up documentation, which may require amendments to existing documents and supplemental documents. There is usually no template solution for a top up round.
  • Exit Strategy: Consider how the top-up round might impact the company's future exit strategy, whether through an IPO or acquisition. Align the terms of the round with these long-term goals and maintain clear communication with stakeholders.

By addressing these considerations proactively, you can navigate a top-up round more effectively and position your startup for continued growth and success.

If you need legal guidance or support throughout the process, please get in touch with us.