For founders of companies, raising capital from investors is a significant step in the entrepreneurial journey and may often prove to be challenging.
At the crucial stage of raising venture capital, here are the key aspects to focus on:
Discussions with advisors at term sheet stage
The desire to secure that initial investment can sometimes lead to a rush to agree to terms. There is a common belief that term sheets are fairly standard and don't require in-depth discussions. In this context, it is vital to take a moment to ensure a clear understanding of the long-term implications of these agreements. Founders should consult with legal advisors to dissect the terms, identify any non-standard clauses, and prioritise their most critical concerns. Negotiating a deal is not always on a level playing field, so scrutinising the fine print while focusing on core issues can empower founders in the negotiation process, even when they have limited leverage.
Protect thy equity
Things may move at a face pace in the initial stages. There are certain things which can be fixed, amended or modified at a later date to give investors comfort when getting that first cheque in. However, confusion about ownership structure, or a poorly planned structure cannot be fixed, and in certain situations can spook investors. Founders should think about including vesting provisions for founder equity as early as possible. It is important to remember that founders are exposed to significant risk if one of the co-founders chooses to leave, requiring the use of dilutive equity to bring on replacement talent. So, founders should satisfactorily address the equity ownership aspects early in the process and implement appropriate vesting terms up front.
IP ownership
Founders should ensure that any IP being developed for the business belongs to the entity and not the individuals behind the development of the IP.
Operational control over the company
In addition to discussions about rights packages, founders should aim to retain operational and governance control over the company to safeguard the daily operations from being influenced by investors' preferences and to preserve the founder's vision. Many startups concede board control too early in their lifecycle. While it may be necessary for closing a funding round, it should be done with caution, as regaining control is exceedingly challenging once it is lost. This issue is amplified when multiple investors demand board seats, potentially overwhelming the number of seats allocated to founders. Multiple solutions exist to address this issue without ceding control, but the key is to approach this topic thoughtfully during the financing process, as control is difficult to regain once lost.
Deal velocity and investor focus
For founders requiring immediate cash to sustain their company or even from a valuation standpoint, closing the deal within stipulated timelines all the while keeping in mind the above discussed considerations is key. Therefore, it is crucial to find an ideal partner for the company when pitching to potential investors. Investors who are willing to provide the founder necessary freedom to operate and scale the company as well as the know-how relating to the business through their experience are ideal partners in the growth journey of a company.
Adhering to these steps will help founders position themselves favourably for Series A financing, gaining the support of investors and strengthening the business.
