THE FOUNDER’S GUIDE TO VENTURE CAPITAL
Dear Subscriber,
At inception businesses are typically financed by the 3 ‘F’s (i.e. Friends, Family and Fools) but at the point when a Company is desirous of scaling its growth it is common that it seeks Investors to bring in funds to help propel its growth in exchange for equity(certain number of shares). Investing at this stage of the business comes with a huge load of risk as the Investor could either make significant returns when the shares grow in value or lose everything if the Company goes bust.
One of the common directions where founders source for capital is from Venture Capitalists who provide the funding knowing that there is a significant risk associated with the Company’s future profits and cash flow. Today we explore the world of Venture Capital with emphasis on seed rounds which are typically the first organized investment round received into a business from venture capitalists.
What are Seed Rounds?
New startups often bootstrap (i.e. operate without external funding) as far as they can before they seek investors to help fund their venture. Bringing in professional investors to finance a company marks a change in the life of the business as so many factors now come to play. This process is otherwise known as Seed Round and commonly involves many demands, meetings, documentation, presentations etc which, if successful, leads to an offering of a document known as term sheet to the founders.
What is a Term Sheet?
A term sheet sets out proposed investment terms and once a founder receives a term sheet, it is highly advisable that he/she seeks advise from professionals before accepting the terms because once a term sheet is signed, the founder and the investor are ethically committed to negotiate and reach closing on an investment into the business. The term sheet commonly sets out the following terms:
- Valuation of the Company
- Distribution of Shares
- Preference Rights
- Management of the Company
- Share Transfer Restrictions
- Intellectual Property Rights
- Confidentiality and non-compete provisions.
- Governing law and competent jurisdiction.
After signing the term sheet, the lawyers then proceed with the drafting of the definitive agreements which typically includes:
- Subscription agreement:An agreement highlighting the allotment and issuance of subscribed shares.
- Shareholders’ agreement:An agreement detailing the relationship between the shareholders of the Company.
- IP Assignment agreement:To ensure that the Founder will assign and transfer to the Company all intellectual property relating to the business (copyrights, trademarks, patents, domain names, etc.).
- Founders’ agreement:An agreement between the Founder and the Company to ensure his/her commitment to the
Completion
Once the definitive agreements are negotiated and finalized the process is perfected by the issuance of shares, enactment of resolutions, appointments of directors, putting in place the new management structure and finally the funds are wired.
TAKEAWAY
The Seed Round is a very critical step for a business as it marks its graduation from just the founders passion to a properly structured business and thus it is important for the parties to ensure proper documentation in other to avoid future problems.
The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters covered in this article please contact a professional.
MOTIVATIONAL VIDEO
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