if you're asking a venture capital fund to invest in your company, you must be ready to meet their expectations. This means ensuring that your company is prepared to take on venture capital investment and providing the necessary documentation so the investor can complete their due diligence. There's no sense in getting an investor excited about your company only to find out that they can't invest because you're missing critical documentation.
Most VCs can't invest in pass-through entities like LLCs or S Corps. VCs prefer that companies they invest in are set up as a C Corp. in Delaware. While some funds will invest in C Corps incorporated in other states, the safest option is Delaware. It's also important that your company is qualified to do business in the states and operates in. You will need to show that you are registered as a foreign corporation in each of these states.
It's a good idea to set up a Google Drive or dropbox file with all the essential records and documentation for your company that can easily be shared with potential investors. Make sure that you and your founding team review these documents prior to sharing them to make sure that everything is in order and that a technicality does not hold up your investment. Below are some things that you will want to include in your records and documentation file.
Right now, we aren't going to go in-depth on the items listed above. The important thing to know is that if you are serious about going after venture capital investment, you must be ready to share the applicable documents from the list. The number of documents you will need to provide Will vary depending on how long you've been in business. Raising money is a lot of work, and preparing to let an investor complete due diligence on your company can be time-consuming.
What is a term sheet?
If a VC wants to invest in your business, they will send you a term sheet. A venture capital term sheet outlines the terms and conditions of a proposed investment and a startup. A term sheet is non-binding apart from certain confidentiality clauses or exclusivity rights. In the best-case scenarios, you can end up with multiple term sheets from different investors. Once you decide which investor you want to go with, you will sign the term sheet so that the VCs due diligence process can begin.
Below is a video explaining the economics of a term sheet by Scott Kupor, Managing partner at Andreessen Horowitz and author of "Secrets of Sand Hill Road."
https://www.youtube.com/watch?v=fH3GuqXagXM
The link below will show you a sample term sheet from Foundry Venture Capital.
https://www.venturedeals.com/docs/SeriesATermSheet.doc
Economics and control
The two biggest factors in any investment deal are economics and control. Economics includes the amount of money invested in your company, the valuation, and the category of stock. Control refers to board seats, voting power, and stipulations that can be included in the investment contract.
Recognize that when you take on investment, you are selling ownership in your company, which means losing some ownership and control. There are many factors to consider around economics and control in an investment deal. We won't go into all of them right now, but if you are considering signing a deal with an investor, it's important to make sure that you understand what you're agreeing to. We recommend bringing on legal counsel with experience in negotiating early-stage venture investment deals that can guide you through the process.
How long does all this take?
When you're considering bringing on investment, the ideal scenario is to begin preparing to raise money one year before you need the money wired to your account. Obviously, this is impossible for many companies, so the shortest time frame you should allow for a venture capital investment would be 3 to 6 months. This gives the investor enough time to do due diligence on your company and allows you the time to shop around with multiple VC's. Other types of investors can close a deal in a shorter time window, but securing investment and choosing the right partner should not be rushed.
if you're asking a venture capital fund to invest in your company, you must be ready to meet their expectations. This means ensuring that your company is prepared to take on venture capital investment and providing the necessary documentation so the investor can complete their due diligence. There's no sense in getting an investor excited about your company only to find out that they can't invest because you're missing critical documentation.
Most VCs can't invest in pass-through entities like LLCs or S Corps. VCs prefer that companies they invest in are set up as a C Corp. in Delaware. While some funds will invest in C Corps incorporated in other states, the safest option is Delaware. It's also important that your company is qualified to do business in the states and operates in. You will need to show that you are registered as a foreign corporation in each of these states.
It's a good idea to set up a Google Drive or dropbox file with all the essential records and documentation for your company that can easily be shared with potential investors. Make sure that you and your founding team review these documents prior to sharing them to make sure that everything is in order and that a technicality does not hold up your investment. Below are some things that you will want to include in your records and documentation file.
Right now, we aren't going to go in-depth on the items listed above. The important thing to know is that if you are serious about going after venture capital investment, you must be ready to share the applicable documents from the list. The number of documents you will need to provide Will vary depending on how long you've been in business. Raising money is a lot of work, and preparing to let an investor complete due diligence on your company can be time-consuming.
What is a term sheet?
If a VC wants to invest in your business, they will send you a term sheet. A venture capital term sheet outlines the terms and conditions of a proposed investment and a startup. A term sheet is non-binding apart from certain confidentiality clauses or exclusivity rights. In the best-case scenarios, you can end up with multiple term sheets from different investors. Once you decide which investor you want to go with, you will sign the term sheet so that the VCs due diligence process can begin.
Below is a video explaining the economics of a term sheet by Scott Kupor, Managing partner at Andreessen Horowitz and author of "Secrets of Sand Hill Road."
https://www.youtube.com/watch?v=fH3GuqXagXM
The link below will show you a sample term sheet from Foundry Venture Capital.
https://www.venturedeals.com/docs/SeriesATermSheet.doc
Economics and control
The two biggest factors in any investment deal are economics and control. Economics includes the amount of money invested in your company, the valuation, and the category of stock. Control refers to board seats, voting power, and stipulations that can be included in the investment contract.
Recognize that when you take on investment, you are selling ownership in your company, which means losing some ownership and control. There are many factors to consider around economics and control in an investment deal. We won't go into all of them right now, but if you are considering signing a deal with an investor, it's important to make sure that you understand what you're agreeing to. We recommend bringing on legal counsel with experience in negotiating early-stage venture investment deals that can guide you through the process.
How long does all this take?
When you're considering bringing on investment, the ideal scenario is to begin preparing to raise money one year before you need the money wired to your account. Obviously, this is impossible for many companies, so the shortest time frame you should allow for a venture capital investment would be 3 to 6 months. This gives the investor enough time to do due diligence on your company and allows you the time to shop around with multiple VC's. Other types of investors can close a deal in a shorter time window, but securing investment and choosing the right partner should not be rushed.