Encode Club hackathon 2025

This is a copy of a talk given by Henry Humphreys on 25 October 2025 at the Encode Club hackathon at 41 Pitfield Street, London.

I’m a lawyer and am managing partner of Humphreys Law. I set the firm up so I got to choose the name.  We advise tech companies and tech investors.  I have been doing this job for nearly 20 years.

But this is my first hackathon.  Thanks to Anthony and Encode for inviting me along.  I only have 30 minutes to speak, but I am hoping to take you on a whistle stop tour of how ideas can be turned into businesses and go from incorporation to raising funds to eventually floating on the stock market.

Which are the most valuable companies in the world today?  Alphabet/Google, Amazon, Apple, Meta/Facebook, Microsoft, Nvidia?  All of those started as an idea.  They all raised venture capital to fund the execution of an idea. They all floated on a stock exchange.  They have all made a lot of people very wealthy.  They have all shaped the world in which we live to a substantial extent.  They are also all American. But you don’t have to be in the USA to try and follow the same path.

Any successful business starts somewhere, typically with one or more founders sat in a garage working on an idea that nobody else has much thought about.  There are many famous stories from this stage of business building: Mark Zuckerberg in his Harvard dorm room; Bill Gates in his garage; and so on.  Bezos could not afford desks so he used old doors sat on breeze blocks.  Perhaps some of you are at that very stage right now, at this hackathon.

So keep a diary! You might need the anecdotes one day.  As I understand it, this is one of the ideas behind a hackathon – bright minds come together to paint out new ideas in broad strokes to see what might be done and – crucially – who might want to work together on them.  It’s a great thing.

There is, however, little value in ideas just by themselves, there is no market on which you can buy and sell them.  Ideas can be protected to some extent with the laws of copyright, confidentiality, patents, etc.  But the point is that there is typically little to no value in them unless and until they can be used to create value in some way (or to stop someone else from using them to create value).  This is part of what venture capitalists call “execution”.

If founders with ideas want to turn them into a business, there needs to be a vehicle for that business.  The vehicle needs to have a separate legal personality – separate that is from the people running and owning the business – so that it can have rights and sign up to obligations itself.  That vehicle is called a company limited by shares.

It has that separate legal personality. It has shareholders’ whose liability for what the business does is capped at the value to be paid for their shares.  And its owners hold those shares – a form of intangible property known as a “chose in action”.  Shares are fungible and there is a limited supply of them, although the company can decide to issue more of them and can create different classes of shares.

The first shareholders are the founders. They own the entire company. But typically there is no value in it yet.  But they own 100% of a very small pie. And can do what they like with it with few restrictions.

What the founders want to do is to take their idea and execute: to find a market for the goods or services they are selling.  For services businesses – such as law firms – the lawyers already have the skills to provide the services and they don’t need to build any technology (and can licence the existing technology that they need).  Typically, they don’t need to raise any new capital as they will be generating revenue from day 1.  If their outgoings are less than the sums coming in, they’ll make a profit.

Tech companies however need to build their tech before they can start selling it. And that requires capital.  By capital, I mean resources.  And in this case the resource is cash. Cash to pay for servers, and developers, and office space, and so on.  It’s expensive to gather the resources needed to build a business.  And if the business fails, all that capital will be lost. So it’s very risky.

Founders typically don’t have the funds or willingness to fund the business themselves.  The business is usually too risky for a bank to lend to: it doesn’t have any revenues and there are no assets for the bank to take security against if the business fails.  The interest on the loan doesn’t balance the risk. The bank doesn’t get a share in any future success. Banks aren’t set up to lose money.

Some government grants are available to promote the development of new technologies in the UK, but those will only go so far.  Typically grants will only be available if other types of funding have also been secured by the business – the government tries to hedge its risk and deploy capital into winning ideas.  So grant funding can be “chicken and egg” – you need the seed capital sorted to get the grant monies. But it’s always worth looking at what’s out there.

But the funding of exciting, risky new ideas is where venture capital comes in.  Venture capitalists will invest into some very risky business ideas to provide the capital to get them going.  Why would they do this?  Because they exchange their capital for shares in the company, a share in the “equity upside”.  It’s very risky. The business may fail for a million different reasons. Founders fall out, the tech doesn’t work, someone else does it better, they run out of money, the law changes and their idea doesn’t work any more, and so on and so on.

For every successful venture, there must have been dozens that tried and failed.  If the business fails, the investor will lose all their money.  But what they are betting on is that those shares will one day be worth a hundred times what they paid for them and they will make a lot of money.  They offset the risk across – taking the same bet on – many different investments, knowing that many will fail and they’ll lose their money.  But that one company they invest in that one day returns 100 times what they paid will make up for all the others several times over.

So is your company “the one”?  Bear that question in mind when pitching to VCs.  If they don’t invest in companies that have a chance of cracking a big enough market they won’t have any chance of one of them making those returns.

They’d be better off putting their money in the bank and living off the interest.  So a peculiarity of venture capital is that the “safer” ideas can be harder to get funded.  Look at the money going into Open AI for instance: it’s massively loss making and hugely risky. But the size of the opportunity is scarcely imaginable.

There are many different types of venture capitalists. A lot of the differences relate to where their money comes from.

Is it their own personal wealth? Angel investors are investing their own funds. They could be City professionals investing their own spare cash and looking for certain tax breaks that come with it.  There are some very good tax breaks in the UK, some of the best in the world.

Or family wealth? So called family offices are the investment arms of very wealthy families or perhaps ultra high net worth investors.

Or a VC fund proper? The standard model for a VC fund is the so called 2 and 20. They manage a pool of other people’s money – limited partners – and charge 2% per annum as a fee and then 20% of any upside in a fund scheduled to be invested and returned to investors over a 7 to 10 year period.

Or a corporate VC? I.e. a large company with enough surplus cash on its balance sheet that it can make investments into start ups.

If it’s friends and family, they may not have the same drivers but they are taking the same risks. They may not have a diversified portfolio of bets also and so are relatively taking more risk, in fact. And if you lose their money you and they will have to live with that.

When raising funds, know who the different kinds of investors are. And understand where they get their money from.  It’s a key dynamic. Another important piece of the puzzle when pitching to VCs.  And VCs go in to invest at different stages. The earlier the stage, the higher the returns a VC will need to make their fund mathematics work.

The risk profile at the idea stage – the “pre-seed” stage – is extremely high. But the investor gets a very low price and the funds required are limited to what’s needed to get the business going and make it to the next stage. Typically the founders are building a minimum viable product, an MVP.

At seed stage, investors are looking for the beginnings of product market fit. Basically, is there a market for the product the founders are building and will it one day be worth enough to get that VC the 100x return they need to make their fund work.

More than one seed round might be needed to get there. The funds are needed to pay for additional team members, more servers, more tech, customer acquisition costs, lawyers, accountants, and so on.  An opportunity in the new world of AI on demand is that these costs are coming down.

Series A is the point at which product market fit has been achieved and there is now a solid business to be fuelled with more capital and scaled.  There is less risk, but the business and therefore the shares have a higher value.  Series B and C are typically the geographical expansion stages.  Again, risk starts to fade away and hedged across different jurisdictions and product lines.  The price of the shares of course goes up again.  Series D and beyond are the late stages where the business seeks to monopolize what it does and prepare for an initial public offering, an IPO.

For any given business, the journey is never as smooth.  Those phrases aren’t legal terms and some companies can go straight to series A and only raise once prior to IPO.  Others can spend 10 years executing seed rounds and not get very far, although most will have failed by then if on that trajectory.  Google only raised one VC round pre IPO. Uber got well into series E and beyond. Space X, Open Ai and others are still going.

In between the series of funding, there are a myriad of other potential events: convertible bridge rounds, venture debt fundings, secondary share sales, and so on. A real soup of amazingly confusing terms and terminology.  Also in the Web3 space there are token raises, SAFTs, and the financing of businesses with the issuance of digital assets. That’s all beyond the scope of this talk but I can field questions at the end if you like.

The theme though is one of iterative development of the technology through the funding rounds, which each funding round raising more capital than the last, and the valuation of the business increasing exponentially on each funding round.

Every time the company issues more shares, the founders are “diluted” – the shares they hold take up a smaller and smaller percentage of the overall pie.  Typically something like 15% to 20% of the share capital is taken up new investors on each funding round.  But if that pie is getting exponentially valuable, the value of those small slices have kept track.  Those founders have ended up holding slivers of a very valuable pie, having owned the whole thing at the outset when it wasn’t worth anything at all.

At the end of that journey, the company will be in a position to IPO and float. The company becomes a public company, new capital is raised on the stock exchange at a price set by the market, and existing shareholders can sell their shares at that price (usually after a lock up period).

Maybe the business doesn’t get to IPO and is acquired by a larger company along the journey. This has been the story of many UK companies – Deep Mind for instance, acquired by Google – and the criticism has been that by selling out mid-stage to US buyers a lot of value for the UK has been left on the table.

The founders hope to have made enough money to never have to work again or to do whatever they like next.  The VCs have those returns they need to satisfy their own investors and to have that 20% of the upside.  The funds made are then invested into the next cycle of companies.

So that’s it. My whistle stop tour of the venture tech lifecycle.

Questions…?

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website. None of the above constitutes legal advice and is not to be relied upon. Much of the above will no doubt fall out of date and conflict with future law and practice one day. None of the above should be relied upon. Always seek your own independent professional advice.

Humphreys Law