December 14, 2022
If you’re at the stage in the financing lifecyle where venture capital is the right route to grow your business, here are five tips to help you prepare to secure the investment.
1. Ensure Your Records Are Up To Date
You’ll want to present your company and its management in the best light to prospective investors. To do this, ensure that:
2. Prepare Your Data Room
Prepare for the due diligence process by having all of the information that investors will ask for at your fingertips. This both makes your company and its management look organized, efficient and professional, and saves you time and money during the due diligence process. An effective way to do this is to set up a data room (or have your legal counsel set it up) that includes all of your company’s pertinent information, including:
3. Identify Gaps, Risks & Required Consents
You might be subject to a requirement to obtain another’s consent before entering into a financing agreement with investors. Some common examples are Shareholders’ Agreements, previous government grants or loans, and by-laws. Other agreements might require you to disclose the nature of the financing agreement, or limit what you can do with your assets. For example, open-source software (OSS) will be covered by a licence, but not all of which is commercially reasonable – if not careful, you might be required to provide any modifications to the OSS back to the licensor. It’s also helpful to proactively check in with existing shareholders to get a feel for how supportive they will be to a financing so it doesn’t come as a surprise and interrupt the process later on.
4. Negotiate the Term Sheet
If you’ve been presented with a Term Sheet setting out the basic terms and conditions of a proposed investment, be sure to consult with legal counsel experienced in VC financings. They can help walk you through what terms typically are, and are not, negotiable, and advise whether the proposal is up to par with current market practice. It might entail some expense up front but you’ll benefit from having someone navigate the deal with you.
5. Be Flexible & Realistic
Familiarize yourself and be prepared for the changes to the company, its structure, and shareholder rights that are about to happen. Investors will likely want some degree of control over major company decisions, board representation, and will likely require certain investor protections such as anti-dilution rights and rights of first refusal. Existing shareholders might be required to enter into an amended and restated shareholders agreement, and the company and certain existing shareholders might be required to enter into an Investors’ Rights Agreement, a Voting Agreement, or other agreements. And be realistic and flexible based on the market conditions at the time, and the amount of energy you’ll put into finalizing the financing deal. It’s a good idea to start the process at least seven to eight months before you plan to raise funds, ensuring you have enough runway capital to get you past the finish line, and enough time to devote to the investor curation and due diligence process – while simultaneously running your business.
Please contact your McInnes Cooper lawyer or any member of our Emerging & High Growth Companies Team @ McInnes Cooper to discuss how we can help you prepare to secure venture capital investment.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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