You know you run a solid business, but…would it be obvious to a buyer or investor?
You’re generating revenue, have happy customers and a fantastic, committed team. You’re considering your options – perhaps growth via investment, or you may be considering selling your shares and handing over the reins to someone else.
Whatever your plans are, at some point you’re going to need to persuade potential investors or buyers, who’ve most likely had no involvement in your business to date, to believe in what you’ve built. And they’ll want to look closely at how you’ve been running things.
The best sale or investment valuations come to those who are prepared.
This article explores the key legal and commercial issues that growing technology businesses need to be on top of, ideally before they get deep into transaction negotiations.
We’ve chosen these topics because they are the ones covered by warranties in the UK Private Capital (formerly BVCA) Model Subscription Agreement. This agreement was designed for venture capital investment rounds and is widely used as a benchmark across investment transactions more broadly. Warranties in other small to mid-market corporate transactions (such as M&A) will often bear a close resemblance to these as well.
This doesn’t mean that every item on the list needs to be 100% in order from the get go - there are bound to be some things that you’ll need to work on over time, particularly if you’re still at an early stage - but the sooner you start thinking about them, the easier they are to address.
This article is just an introduction to the general areas of focus. Over the coming weeks we’ll publish articles covering each area in more detail, so check back regularly for a deeper dive into the topics you’re most interested in!
What Areas Should You Focus On?
The warranties in the UK Private Capital (formerly BVCA) Model Subscription Agreement cover the following key areas:
- Corporate structure: Confirmation that the company is properly incorporated, its shares are correctly issued, and that there are no unusual rights or restrictions attached to them. This sounds routine but issues crop up more often than you might expect, and often in ways that the founders were completely unaware of.
- Financial position: Accounts, management information, debts, and tax compliance. Investors are buying into the financial reality of the business and want assurances that the numbers you've shown them are a true representation.
- IP and technology: Whether the company has valid ownership of its intellectual property and whether that IP is properly protected. For tech businesses, this is often where the hardest questions arise as this is where much of the value of the business sits.
- People and employment: Contracts with connected persons, employment contracts, option schemes, compensation arrangements, and compliance with employment law. Investors will want to know whether key people are properly tied in and whether there are any tribunal claims or grievances lurking.
- Regulatory compliance: This covers GDPR and data protection, sector-specific regulation, and any licensing requirements that apply to the business. For some tech businesses, failures in these areas can mean that the business is unable to function.
- Artificial intelligence: The 2025 update to the Model Subscription Agreement introduced standalone AI warranties for the first time. If your product uses AI technologies, investors will want assurance that you're complying with applicable AI legislation, that you've considered the data used to train your models, and that you have appropriate oversight in place. This is an area that's moving fast both technically and legally, so it's worth getting on top of sooner rather than later.
- Legal proceedings and contracts: Any existing litigation, disputes, or material contracts that could affect the business. A claim that hasn't yet been issued is still relevant.
There are a few additional warranties that we aren’t going to look at in any great detail as they are more operational than legal – these are Initial Business Plan, Properties, Insurance, Assets/debts/stock, Group structure.
Why Being Prepared Matters
You don’t necessarily have to be 100% tight on every aspect that might come up in warranties at a later date, but it’s definitely worth being ready for questions on the above topics. Investors and buyers expect the management team to be able to explain their position, and the final warranties you’re asked to agree to will mean that there’s a contractual risk if what you tell them turns out to be untrue.
And you can’t just stay silent about issues and hope they don’t notice. When you’re going through a transaction process – whether it’s an investment or a sale – there is typically a formal process of disclosing all issues that you should be aware of. If you’re only discovering these at the same time as your potential buyer or investor (in the worst case, as a result of their due diligence) it’s a very bad look.
Being completely clueless is a big red flag to anyone looking in from the outside, and can lead to:
- Additional due diligence: investors/buyers will inevitably want to investigate further if they don’t feel confident in the initial responses to due diligence questions. This can be time consuming, especially if internal investigation is needed to respond.
- Price chips: uncertainty can lead to the value of the offer being reduced.
- Deals falling through: the worst-case scenario is for a deal to fall through completely because an investor or buyer can’t assure themselves that the business can deliver.
Common Areas Where Businesses Get Caught Out
There are a few things that come up regularly in transactions, where companies haven't done all the necessary prep:
- IP ownership gaps. It’s always a concern if founders or contractors haven't effectively assigned key intellectual property rights. Even if there’s a paper trail for all IP in the primary product, it’s easy to forget that “secondary” IP, such as the company’s branding or website also needs to be properly assigned. It’s typically quite straightforward to get this sorted, but still best to do it well in advance.
- Open source code. Almost all technology now includes some elements of open source code, so you might be surprised to hear that it’s still seen as a red flag for buyers and investors.It’s worth knowing exactly what you use, and which licences apply so that you show that you’re aware of and have managed the risks.
- Option schemes. In early-stage companies option schemes are often set up informally, or set up using templates that weren’t fit-for-purpose. Schemes also need to be properly managed and maintained. EMI schemes in particular need to meet specific conditions to retain their tax advantages.
- Data protection compliance. This is rarely the primary focus for founders, especially if personal data isn’t a core aspect of the main business. Again, this can be seen a red flag, so it’s worth conducting at least some basic compliance activities prior to approaching investors or buyers.
- Contracts with customers or key suppliers that contain change of control provisions. Ideally, you wouldn’t have agreed to any clauses where termination or other adverse effects can be triggered by a transaction. If you have done so, these should be identified early, as buyers and investors will need to be reassured that key contracts will continue post-transaction.
- Directors' loans and other related party transactions. It’s of vital importance that these are properly documented and formally approved by the company.
This isn’t an exhaustive list, but the above covers some of the most common issues that we regularly come across, which should ideally be addressed well in advance of a transaction. The earlier these types of things are identified, the more likely it is that you’ll be able to demonstrate to potential investors and buyers how well your business is run.
What You Can Do Now
The most useful thing a technology business can do before entering a fundraise or M&A process is to carry out its own internal review.
That means going through your corporate records, IP documentation, employment contracts, data protection (and other regulatory) compliance, and financial arrangements with the same level of scrutiny that an investor or buyer’s lawyers will apply. Not to create a perfect picture, but to understand where the gaps are so you can address them in good time.
This doesn't need to be a lengthy exercise, and it doesn't need to be expensive. But it does need to be thorough, and it genuinely benefits from experienced legal input – ideally from someone who has seen the same issues arise across multiple deals and knows what investors will focus on.
Over the next few weeks we’ll be providing additional insight into each of the key areas outlined above to give you a head start!
The Bottom Line
Preparing for sale or investment shouldn’t be left until the other side’s lawyers are conducting due diligence. Being properly prepared requires an understanding of your business, your documentation, and where the potential issues lie. The companies that get through deals most cleanly and with the highest valuations, are the ones that started thinking about this well before someone else was asking questions.
This article has outlined the key areas at a high level. Across the rest of this series, we'll look at each in more detail - IP ownership and protection, option schemes and employment law, data protection compliance, and how to approach disclosure effectively.
If any of this has raised questions about where your business stands, it's worth having a conversation sooner rather than later.
This article is for general informational purposes only and does not constitute legal advice. If you would like to discuss your specific situation, please get in touch with the ClearCube team at hello@clearcube.law