You’ve surely heard the cautionary tales of startup founders going through the venture capital fundraising process for the first time.
If you haven’t experienced a round of venture capital fundraising, then you don’t know what you don’t know. Entrepreneurs will often come out the other side of their first fundraising round with a list of regrets, or at least a list of lessons learned for their next time stepping into an investor pitch meeting. Maybe intentions were good, but entrepreneurs run into problems when they don’t ask for enough help or don’t take the time to truly understand the process and documents associated with their financing.
Savvy founders understand that acing the startup funding process comes down to planning ahead, and then planning ahead some more. Every entrepreneur is busy. Taking the time to educate yourself around common fundraising mistakes, however, can ensure you leave your fundraising round with excitement for the future, rather than regret.
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Investing in the right advice, and the right tools, is key. We founded Shoobx on the realization that the venture capital fundraising process for entrepreneurs is broken. Here, we’ve outlined six tips to help startup founders “unbreak” their startup fundraising process:
1. Find the right support crew
It might be your first rodeo: but your investors have likely been through many deals before. To prepare for pitch meetings, surround yourself with the right mentors and advisors so you’re getting the advice and know-how you need to succeed. Tap your “coaching staff” of mentors, former colleagues, and peers to help you prepare and provide feedback.
Ideally, find an entrepreneur friend who’s been through the process before. They’ll have insights on potential pitfalls, software they use, and law firm contacts that might be able to help.
2. ...and find the right lawyer
Speaking of attorneys, building a relationship with the right lawyer is crucial for success in fundraising. Your lawyer should have a portfolio of clients that matches your company profile. If you're the founder of a seed-stage cybersecurity platform, try to find a lawyer who’s worked with other companies in the same market or growth stage as yours. This way, you know they’re an expert in the areas you’ll be addressing.
Make sure your lawyer is excited to adopt the modern LegalTech and FinTech software solutions you’re using to simplify diligence and equity management. Your lawyer should meet you where you are, rather than forcing you to work outside your existing set of tools.
Lastly, and most importantly, your lawyer should work the way you want. If you’ve established a strong rapport with a partner at a firm, ensure that you’ll be working with that person, rather than another (potentially less experienced) point of contact. You are the client, so make sure you’re getting what you need, from the right person.
3. Get documents right the first time
Whether you want to believe it or not, the founder doesn’t dictate their company’s equity: the documents do. Keeping accurate documentation can be difficult, but founders (and their legal/finance teams) that are responsible and organized in the early stages will usually be rewarded long-term.
When it gets down to fundraising time, you’ll want the peace of mind that comes from a clean cap table and organized documents. A lack of attention to detail means that founders have to allocate hard-earned fundraising dollars towards costly legal fees to enlist their lawyers in a last-minute cleanup effort. Lawyers can clean up your documents, but it’s better to put that money towards growing your company.
Properly managing your equity financing documents, from main transaction docs to ancillary ones, is a worthwhile investment to help “future you.” You might not understand the minutiae of these documents as well as your lawyer, but you still have the power to get them right, the first time.
Throughout the startup fundraising process, it can be tempting to say “I’ll deal with that once we get to funding.” But, difficult conversations only become more complicated with time. Staying ready for financing means addressing issues in real-time (and in advance if possible), so nothing comes back to bite you when actually raise capital.
Take the example of vesting. Procrastination can ultimately kill an otherwise perfect deal. Proactive startup founders will set up a reasonable vesting schedule early on, so that they won’t need to amend their founder grants in connection with a fundraise. Taking care of this early on allows investors to look at your founder grants and say “yup, looks good”.
This thinking applies to equity as well. Clean up that cap table today; your documents dictate the future of your company for you and your equity holders.
5. Take the time to understand the basics of equity management
Venture capital firms generally want to limit their risk. Messy cap tables and disorganized documents can deter investors from a potential deal. What’s more, founders will be spending precious time and resources to clean up skeletons in their closet, rather than closing a deal or hiring another valuable team member. That curbs your startup’s growth potential!
Startup founders don’t need to be finance or legal wizards; they just have to understand the concepts that matter to investors (and to the future of their company).
A good place to start is the term sheet, which provides a snapshot of the investment terms that are revealed in lengthier financing documents to come. Entrepreneurs and venture capital firms must agree on the term sheet to kick off the deal. By familiarizing themselves with terms like “option pools” and “protective provisions”, startup founders can come to the table prepared for negotiations.
6. Understand the importance of representations, warranties, and the disclosure schedule
The Stock Purchase Agreement (SPA) is a pivotal document for private equity fundraising. Most entrepreneurs focus only on pre-money valuation and liquidation preferences. Two crucial aspects of the SPA can be overwhelming to founders: representations & warranties, and the disclosure schedule.
These sections give investors further knowledge: more depth than the pitch deck or conversations with the founder, that are usually focused on market, branding, and financials. Representations and warranties are generally statements about different aspects of the company - from team members to contracts to possible litigation - with clarifications and exceptions explained in the disclosure schedule.
Do your homework, and talk to your lawyer, to understand what to disclose. Striking a balance is key; disclosing more information might make your company look like a riskier investment, but doing so also ensures you’re not misrepresenting anything.