Raising funding is every startup’s dream.
Being given cash to grow the thing you’ve poured your blood sweat and tears into as you built it from scratch must feel fantastic. But is it all rosy?
Going from having full control over your startup – it’s look, feel, strategy and direction – to having someone else wanting or even demanding input must be very strange indeed.
Handled incorrectly, everything could soon go downhill, relationships could turn sour and running your company could quickly go from being exciting and fulfilling to joyless and a downright chore.
It’s for this reason you need to think carefully before signing an investment agreement on the dotted line.
There are certain things you need to be clear on to make sure your relationship with your investors starts off, and remains, hunky dory.
The right investor
“It can be really hard for a startup to turn down an offer of much-needed cash,” said Caroline Sherrington, senior counsel at legal firm Ignition Law. “But our advice to our clients is always to take a step back and make sure you know who you’re getting into bed with before jumping at the first deal that comes along.”
She stressed that getting the wrong investors on board at the start could end up really hampering your business and stifling growth and innovation going forward.
Sherrington advised doing research to identify investors who have the same values as you and who really believe in the mission statement and growth path of your company.
“Your life will be made much easier (and negotiations much more productive) if interests are aligned on both sides from the start,” she explained.
Do some due diligence on any potential investors and feel free to ask them questions: what do they look for in their investments? Can they give examples of other companies they’ve invested in? How much involvement do they tend to take in their portfolio companies? Asking questions such as these will allow you to find out a bit more about the investor’s values when looking to invest in businesses and also how much interest they will actually take in yours.
Sherrington said, if you do get to term sheet stage, think carefully about what goes in this document as this will form the basis of your long form investment documentation.
“It should be in everyone’s interests to allow the business to use the investment monies as it deems fit, so watch out for terms that put unnecessary operational restrictions on your running of the business, such as overly burdensome lists of consent matters or requests for detailed, monthly accounts,” she explained.
Such requirements can end up wasting valuable time, which, at such an early stage of your business, would be much better spent on developing and growing your product offering.
“Finally,” advised Sherrington, “make sure investors don’t demand too much up front that will put off or set precedents for future investors down the line – look out for things like ‘right to match offer’ clauses or ‘anti-dilution’ provisions as these are not generally not appropriate for early stage fund raisings.”
Ted Nash, CEO and co-founder of Tapdaq, an app marketing tool for mobile developers, raised a $6.5m Series A from Spring Partners, BGF and Balderton Capital earlier this year.
He told me startups must be clear on the motivations behind their search for funding – do you need money to grow your user base, expand your market, hire world-class staff or are you just looking for guidance to help take your business forward? Being clear in this will help you find the right investor to partner with and makes sure there is no confusion from the get-go.
“There are different stages of funding, so be sure you know what type of investors you should be looking for. Ask yourself, aside from the money, what value and expertise can your future investor bring? Does their experience align with the vision of your business? It’s not only the monetary benefits you’ll be getting, it’s the experience and knowledge of the investors themselves,” Nash added.
He also advised startups to think carefully about the amount of equity they are prepared to give away. “Giving away equity is really a one-way street, once you have sold it, it’s expensive to buy it back.”
Isabel Fox, head of venture at White Cloud Capital agrees. She said that with any type of funding it’s important to make the right decision for both the business and the management.
“Venture capital is one answer, but it does come with governance, controls and accountability to investors, therefore, it’s important to find the right VC that provides more than just the money and is a long term trusted partner that adds value.
It’s no different to a marriage and getting it right is critical for all stakeholders to benefit,” she added.
… To read the rest of this post head over to Cisco’s Startup Hub blog.