Startup Fundraising During COVID-19

As the financial and economic implications of the COVID-19 crisis continues to effect organisations across the industry spectrum, early-stage companies are in a particularly vulnerable position as they rely heavily on funding and investment. There is a strong likelihood that the pandemic will lead to delays in investments as investors will likely focus on existing companies in their portfolio and may invest over a longer period of time, while valuations may also be lower than expected.

As such, the Government recently announced a range of supports for scaling and startup enterprises, many of which are administered through the Department of Business, Enterprise and Innovation (DBEI) and Enterprise Ireland. These include:

• a €450 million Strategic Banking Corporation of Ireland (SBCI) Working Capital scheme for eligible businesses impacted by COVID-19. Loans of up to €1.5 million will be available at reduced rates, with up to the first €500,000 unsecured;
• an additional €200 million for the SBCI Future Growth Loan Scheme. The extra €200 million will be released in tranches, to provide longer-term loans to COVID-19 impacted businesses. Loan amounts will range €100,000 to a maximum of €3 million per applicant. Loan terms range from 8 to 10 years and loans of up to €500,000 can be unsecured;
• a €200 million Package for Enterprise Supports including a Rescue and Restructuring Scheme available through Enterprise Ireland for vulnerable but viable firms that need to restructure or transform their business;
• a new €180 million COVID-19 “Sustaining Enterprise Fund” administered by Enterprise Ireland providing up to €800,000 in (repayable) liquidity support for companies affected by COVID-19. The Sustaining Enterprise Fund will be available to companies who are unable to access adequate funding from the market, financial institutions or the SBCI. The Sustaining Enterprise Fund is open to eligible companies that:
• employ 10 or more full time employees;
• are operating in the manufacturing and internationally traded services sectors;
• for SMEs – that have applied for funding from a financial institution, including, where appropriate, through the SBCI COVID-19 Working Capital Loan/Future Growth Loan Schemes; and
• for large companies – that have applied for funding with an appropriate financial institution;
• a €5,000 COVID-19 Business Financial Planning Grant to help companies to develop a business sustainment plan. The grant will support companies with 100% funding to engage the services of an approved Financial Consultant to develop this plan for use when applying for bank or investor funding and when developing their own medium-term financial strategy. Enterprise Ireland will work with such companies on a one-to-one basis to support the implementation of the business sustainment plan;
• A Finance in Focus grant of €7,200 will be available through Enterprise Ireland and Údarás na Gaeltachta for consultancy support in undertaking immediate finance reviews;
• a €2,500 Lean Business Continuity Voucher – a training project of up to three days carried out by an approved external advisor/trainer directly with an eligible company;
• a €2 million COVID-19 Online Retail Scheme providing a grant for retail companies with greater than 10 employees to develop a more competitive online off This competitive call has a budget of €2 million. Successful applicants will receive funding support of up to 80% of project costs, with a maximum grant of €40,000;
• the maximum loan available from Micro Finance Ireland will be increased from €25,000 to €50,000 as an immediate measure to specifically deal with exceptional circumstances that micro-enterprises are facing;
• the Credit Guarantee Scheme will be available to COVID-19 impacted firms through the Pillar Banks. Loans of up to €1 million will be available at terms of up to seven years;
• Enterprise Ireland will continue to operate the Strategic Consultancy Grant, which supports the cost of hiring consultants to act in an advisory role and assist in the development and implementation of strategic initiatives in the business. Up to 50% of the costs incurred in hiring a consultant are eligible, up to a maximum grant amount of €35,000; and
• Enterprise Ireland will also offer the Agile Innovation Fund supports the development of new or substantially improved products, services or processes, where the total project cost is less than €300,000 and provides a grant of between 25% and 50% for staff costs, materials and consultancy.

From a European perspective the European Commission and European Investment Fund (EIF) announced that they are launching ESCALAR, or European Scale-Up Action for Risk Capital, providing €300 million for start-up and scale-up tech companies. The ESCALAR initiative has been in the works for years, as part of a new SME strategy to improve access to finance for small and medium-sized businesses. The current pandemic and ensuing economic turmoil has triggered the launch of the program. The program will remain in pilot phase for 2020 with the objective that ESCALAR could become a mainstream European financial instrument. Interested fund managers can participate in the scheme by responding to the EIF’s open Call for Expressions of Interest.

Obtaining Funding

Family and Friends

While often the first port of call for early-stage companies seeking financial injections, it is important that proper documentation of  the terms of the transaction is done in order to avoid misunderstandings about equity ownership to ensure that these investors understand the risk of their investment, and also  to avoid frightening off later stage investors.

Enterprise Ireland

Enterprise Ireland has committed up to €175 million as a cornerstone investor to venture capital funds under the Seed & Venture Capital Scheme 2019 to 2024. Equity investment is provided through its High Potential Start-Up and Competitive Start Fund programmes. Enterprise Ireland also offers a number of feasibility study/innovation grants and funds are made available for the commercialisation of research as well as funding to participate in collaboration programmes.

Microfinance

Microfinance Ireland is a not-for-profit lender established to deliver the Government’s Microenterprise Loan Fund and provides loans of up to €50,000 to newly established start-ups or growing micro-enterprises that do not meet conventional risk criteria applied by commercial banks. The term on such loans is generally between 3 and 5 years.

Crowdfunding

Crowdfunding is typically operated either through an equity investment or via P2P lending. At present, the lending model is more prevalent in Ireland through platforms such as Linked Finance, Fund:it and Kickstarter. Spark Crowd Funding is Ireland’s first equity crowdfunding platform.

Incubators

Incubators allow access to considerable sums of money coupled with mentoring expertise, as well as resources that are not otherwise readily available. Some incubators also offer some cash funding or prizes within their programmes. Options in the Irish market include the NDRC, Wayra Ireland and Dogpatch labs.

Venture Capital

Venture Capital will often take the form of an unsecured, equity investment for a minority stake. Ireland has a number of active venture capital investors including ACT Venture Capital, the AIB Start Up Accelerator Fund, the Bank of Ireland Kernel Capital Growth Fund, Atlantic Bridge, Frontline Ventures and Fountain Healthcare Partners. Active development capital funds include MML Capital Ireland, the BDO Development Capital Fund and the Cardinal Carlyle Ireland Fund.

Angel Investors

Angel Investors are high net worth individuals who provide smaller amounts of finance at an earlier stage than venture capital firms are able or willing to invest. Angel investors usually contribute more than capital, as they often have industry knowledge and contacts that can be of benefit to the investee company. They may also fulfil a non-executive director role for investee companies, providing guidance to early-stage companies.

Other Considerations for Incorporated Entities

Temporary Wage Subsidy Scheme

It is important for companies who keep employees on the payroll throughout the COVID-19 pandemic to be aware of Temporary Wage Subsidy Scheme which enables employees, whose employers are affected by the pandemic, to receive supports directly from their employer through the payroll system. The scheme is expected to last 12 weeks from 26 March 2020. From 20 April 2020, the operation of the scheme will ensure that the subsidy paid to employers will be based on each individual employee’s average net weekly pay, subject to the maximum weekly tax-free amount:

• capped at the level of 70% of previous average weekly take home pay, to a maximum of €410 per week;
• capped at €350 for employees where the previous average net weekly pay is greater than €586 but less than €960; and
• no subsidy will be paid where previous average weekly net take home pay exceeds €960 per week.

We expect further detail to be issued by Revenue over the course of this week.

Annual General Meetings

Company directors and secretaries are well advised to modify their usual planning for their company’s annual general meeting. Single-member companies and limited companies may dispense with the requirement to hold an AGM where, before the latest date for the holding of that meeting, all members entitled to attend and vote at the AGM sign a unanimous written resolution approving the business of the AGM.

Directors Meetings

Unless the constitution provides otherwise, directors’ meetings may consist of a conference between some or all of the directors who are not all in one place but each of whom is able to speak to and be heard by each of the other directors (directly or by means of telephonic, video or other electronic communication). A director taking part in such a conference will be deemed to be present in person at the meeting and be entitled to vote and be counted in the quorum.

How we can help

If you are interested in discussing any of the information contained in this article further or you would like to keep up to date with the latest legal developments for Irish startups, follow us on LinkedIn or contact Joe McVeigh, Partner in our Corporate Department, on jmcveigh@bhsm.ie / +353 1 440 8300.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.