Now that you know the five steps involved in the Venture Capitalist “process”, we can look more closely at each.
So let’s start at the beginning of the process…Prepare…and the steps involved:
- Must establish a C-Corp entity structure
- Must create a GREAT Executive Summary
- Must write a detailed Business Plan
- Must prepare a Venture Capital Term Sheet
- Must have an attorney prepare a Stock Purchase Agreement
- Must amend your Bylaws (or a “Certificate of Designation”)
- Right of First Refusal/Voting Agreement for VC
- VC Consulting Agreement (if Applicable)
Let me address each of these steps briefly.
First, to obtain VC funding, you can’t be operating as an LLC or sole proprietor; you must be a C-Corp and deal with compliance for that designation.
The Executive Summary is what will open doors to Venture Capitalist companies; and for that reason alone, it must be GREAT!
The Business Plan you will need to prepare at this stage is not your one- to three-page document, but a very well researched, detailed document that you should consider getting proper help to prepare.
The VC Term Sheet is typically a non-binding document that outlines the terms of the deal. It’s an important investor packet item that says, “Here is what we’re all about and what we’re going to give back in return.”
Obviously, the Stock Purchase Agreement is the document that sets the terms for the VC investment, inclusive of the purchase price, closing date, and conditions regarding the issuance of the stock. Needless to say, this is a very important document that an attorney should handle and/or review to be sure you dot your “i’s” and cross your “t’s”.
Your Bylaws will need an Amendment (or create a Certificate of Designation) that creates the new preferred stock class and addresses anti-dilution provisions, as well as dividend, liquidation, and conversion rights. This is an item that you can find great templates for online.
The Right of First Refusal document is important if you will be offering more stock later. Your Venture Capitalist will want the right to fund it first. As for the Voting Agreement, Venture Capitalists want board positions and, with that, voting rights. My position is that the borrower should try and limit this as much as possible. In fact, try to leave it out if they don’t bring it up.
Finally, the VC Consulting Agreement will address any resources and/or management teams that will be brought to the table, the fees involved, how long they will be involved with the company and when they will step aside.
As you can see, just this first step in the Venture Capitalist Funding Process is involved. You need to be prepared to dig in and focus. In upcoming blog posts, I’ll address subsequent steps in the process. In the meantime, if you are now going through it or have been through this preparation process, I’d love to get your insights from the experience.