8 Vital Steps to Prepare You for Going After Venture Capitalist Funding

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:

  1. Must establish a C-Corp entity structure
  2. Must create a GREAT Executive Summary
  3. Must write a detailed Business Plan
  4. Must prepare a Venture Capital Term Sheet
  5. Must have an attorney prepare a Stock Purchase Agreement
  6. Must amend your Bylaws (or a “Certificate of Designation”)
  7. Right of First Refusal/Voting Agreement for VC
  8. 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.

 

Three Key Types of Funding and Criteria You Need to Know to Finance a Business

If you have come to the conclusion that financing your business is the most beneficial and…in the end…most lucrative option for starting or growing your company, you should familiarize yourself with the overall “funding landscape”.

Before I say more about the general landscape, I do want to address a few facts of which you should be aware if you are a female business owner. Albeit the rate of women starting businesses these days is twice that of men (women own 30% of privately owned businesses), statistics also show that:

  • Most female-owned businesses earn less than six figures
  • 30% of the businesses owned by women generate only 11% of business sales
  • If you’re a self-employed woman, you make 55% less than a self-employed man
  • Women seek less financial help for their businesses
  • Women historically have had less access to funding, but that is changing

Different kinds of funding sources often focus on financing businesses based on different criteria, such as:

  • The stage of the business cycle you are in
  • How much risk you’re willing to take (if you’re willing to take more risk, you have more opportunities)
  • What you already have in the way of financial resources
  • How much you want to control your company

As a rule, the more financing you need, the longer the funding process will take.  It’s important you’re clear on where your business is in the funding landscape:

  1. Seed Funding – getting things off the ground; often done by owner, family and friends
  2. Bridge/Angel Funding  – your business is showing signs of growth, revenue, and merit
  3. Venture Capitalist – when your business has signs of quick growth, as well as the potential for a quick return on investment

Keep in mind that there is no “right” or singular way to finance your business venture.  Although the pursuit of funding has been described by some as a “shark tank”, it should be comforting to know that there are definitely people out there wanting to invest in businesses for the right reasons (i.e. Crowd Funding).  Make yourself aware of the basic processes and do your due diligence.

Our future blog posts will expand on each of the three funding types, and explain the advantages and disadvantages for each one. Be sure to start thinking about the stage of business you are in and your risk level as you finance a business.

Why Get Help to Finance Your Business

So…you want to start your own business.  You have a passion and a vision that you’re sure will translate into a successful venture and now is your time!  Or perhaps you already have a business that is up and running, but you want to take it to the next level.  Though you may have some personal resources for infusing your business with cash, maybe you should consider the reasons why financing your business is an excellent alternative.

Considering the idea of seeking funding for your business may seem like a daunting task, especially if you are a start-up operation.  But it may surprise you to know that there are more and more opportunities these days for unearthing much-needed financial support.

Still the question on the table is “why” go searching for ways of financing your business.  Statistics are showing us these days that those businesses that do take advantage of outside funding benefit by:

  • More rapid growth than those who try to fund themselves (the lone wolf often ends up lonely and struggling)
  • Total sales that average five times more after ten years than those of companies that aren’t funded
  • Receiving access to resources that may not fall into their area of expertise

These additional resources can include, yet may not be limited to, strategic and collaborative partnerships, new and unique talent pools, and much-needed management skills.

If any of these “whys” sound appealing (and why wouldn’t they), pursuing a means for financing your business should be at the top of your list of ways for infusing your company with not only monetary help, but also other extremely valuable resources.