You’re a Startup CFO, and your company is raising capital. It’s an exciting time, where much of the burden — including tasks outside your normal set of responsibilities — falls on you. How can you minimize the noise of these disconnected requests and better focus on the critical aspects of your role as CFO during a venture capital fundraise?
It’s a complicated question, and a layered one — the answer changes based on the stage of your company.
However, there are certain CFO fundraising fundamentals that can transcend industry, company size, and funding stage. Successful Startup CFOs will implement a culture of accountability for documents and processes, and they will search for the right tools to help their company stay ready for financing.
Fundraising really refers to a two-stage process from a CFO perspective.
- Fundraising Prep and Pitching — This includes the traditional fundraising activities, such as tailoring your brand’s messaging and metrics for pitch decks to prepare you for meetings with venture capital firms. If all goes well, you’ll receive a term sheet, which signals the second phase.
- Negotiations and Due Diligence — The term sheet begins the due diligence process. Every institutional VC has strict risk management requirements. If your company’s documents and cap table aren’t in order, it creates liabilities for the venture capital firm. No one wants to get stuck at the one-yard line, which is why it’s important for CFOs to take responsibility for streamlined, day-to-day steps that make life simple when it’s time for fundraising.
Related Content: What Does a CFO Do During an Equity Raise?
Always be preparing for due diligence
Your company is like a fishing line…but don’t think you can put up a “Gone Fishing” sign until just before your venture capital fundraise!
(Bear with me on the metaphor.) Your founder casts out a fishing line, i.e, starts your company. As your line goes further into the water (your company grows and adds stakeholders), there are more opportunities for tangles in your line. Suddenly, it comes time to reel everything in (sort out your documentation for equity financing). If your line is tangled and clumped, it’s not going to be easy.
You don’t want to be feverishly untangling your line as investors are watching over your shoulder, and attorneys are asking for context, information, and documents. Nobody wants to deal with a gnarled mess of friction and extra legal work when waiting for a deal to go through.
Snapchat: a real-world example
It can be easy to think “that’s never going to happen at my company. We’ll figure it out before then.”
However, even the biggest companies aren’t immune to due diligence mistakes. Look no further than the story of Snapchat and its co-founder Reggie Brown.
In 2013, as Snapchat was preparing for its IPO, Brown settled a lawsuit with the company for an astounding $157 million. It turns out Snapchat never had Brown sign an intellectual property (IP) assignment agreement (which effectively states that everything he worked on while at Snapchat belonged to the company). IP agreements typically get signed when employees join a startup, but sometimes slip through the cracks when there’s not clear communication about who oversees this task, as it did here with Snapchat.
Over the course of their explosive growth, this missing IP agreement would have typically been found during the due diligence process, but wasn’t uncovered as investors and other stakeholders were focused on Snapchat’s rocket-like trajectory. Brown legally had a case that he himself owned the logo, marketing colors, and other Snapchat IP. The ensuing settlement wasn’t cheap: nor was it necessary.
No CFO wants to be blamed for a $157 million mistake. That’s why taking care of issues (or better yet, preventing them) in real-time is the key to acing your equity financing responsibilities as a CFO.
Related Content: What to Expect During Due Diligence & The Documents You Will Need
Four tips for CFOs to ace the due diligence process
I didn’t mean to scare you (okay, maybe just a little). The truth is, the equity management process is an incredibly important responsibility for any CFO. To help guide you, we’ve outlined four tips:
1. Establish clear ownership of documents and processes.
Every Startup CFO has to know, on the most basic level, which due diligence tasks are handled internally, and which can be outsourced to an attorney. Don’t assume that you can hand your knotted fishing line to even the most experienced lawyer and expect they’ll magically untangle it.
Establish a singular place where important documents should be stored. Firmly outline what items the CFO and the finance team is responsible for, and which ones HR can handle. It sounds simple, but outlining a clear plan and defining ownership can make all the difference in the world.
2. Stick to a process for new hires.
Onboarding new employees is often the biggest source of complexity as a company grows. Being proactive will reduce stress. Take care of your new hires one by one, rather than retroactively when it's time for equity financing.
You don’t want offer letters, stock agreements, and IP assignment agreements floating around in the nebulous. It’s essential to create a streamlined, organized system that outlines where documents are saved, the ownership of said documents, and the steps needed to move the process along for each new hire.
3. Create a shared understanding of WHY the process is important.
It can be easy to look at due diligence as secondary administrative work in the moment. A Startup CFO is responsible for making sure the entire company understands the importance of documentation from the start.
Provide real examples of the process gone wrong. Share the story of Snapchat. Help employees understand that if documentation and cap tables aren’t sorted before financing, the company might not reach its potential. A lack of stability increases risk, meaning the company’s next fundraise or liquidity event (think: IPO, merger, or acquisition) could be affected, or even derailed. Employees could watch their stock options plummet in value. That’s why it’s a team effort to get these particulars right.
4. Get your tech stack in order...now!
Many early companies have their cap table in Excel, or in seemingly advanced online tools. However, just because you have a solution doesn’t mean you have the solution. There’s software out there that does much more than store your information. You can find an equity management solution that provides a single, fully-integrated hub for automated equity financing, from start to finish. Startup CFOs deserve tools that make financing easier day-to-day, like accurate scenario modeling and a single secure data room. Expect more from your technology!
How Fidelity can help Startup CFOs with the equity financing process
Startup CFOs are bombarded with unforeseen challenges and tangential problems throughout the day-to-day management of their company. These various hiccups can bubble up into real roadblocks during fundraising events. A system that brings all of the various documents together – with intuitive inputs, workflows and an automated data room to store them – will help CFOs spend less time correcting errors, and more time handling the business operations that really matter.
Solving your equity management takes a lot more than a fancy-looking digital spreadsheet. That’s why Fidelity offers the right tools, and the right expert guidance. With our platform, Startup CFOs can decrease risk, reduce costs, and streamline due diligence – keeping their company ready for venture financing at all times.
Learn more about our solutions to help startup CFOs manage equity data and automate the financing process.
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