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Crowdfunding - WCP 2014

 

Raising Capital is a lot like Internet Dating!

Raising capital is stressful and incredibly time consuming. It’s a full time job. So if you embark on a money raising mission, make sure your business is at a stage where it can survive (and hopefully flourish) with minimal input from you. The capital raise will demand most of your time and attention for the next little while.

It’s actually a lot like internet dating. You write a profile (information memorandum) you go on a first date (swipe right), you decide if you’d like to see each other again, (thank-you text), one party plays hard to get (valuation), meet the parents (due diligence), buy a ring (appoint lawyers), ask the question, (term sheet) and get married (settlement).

Once you’ve got a little seed money to work with, it really then becomes an issue of timing. If you go to the market looking for money before you have a concept or product, you don’t have as much leverage with investors and could potentially be beaten down on your valuation. So founders are generally better off building the product and getting as much traction as possible before courting significant further investment to reduce the risk profile of their venture.

The longer you can hold off, the more leverage you have with investors. But the longer you wait, the more risk there is that your competitors will land funds and get the jump on you. And it can be hard to play catch up.

Preparing the business for a capital raise correctly is critical. My advice is to find yourself someone who knows what they are doing, has experience in the area and importantly is respected by the VC community.

A skilled and trusted advisor is worth their weight in gold, they provide invaluable advice on how to groom the business for a capital raise, such as having an attractive shareholders agreement, employment agreements, and commitment from the founders in place.

Once you have a data room prepared with an information memorandum and financial model  hit the pavement and talk to investors.

Let your advisor’s line up 10 or so meetings, target verbal commitments from these early potential investors. The best way to describe this part is that no one is ‘in’ until they sign a term sheet. Have one of these prepared and printed in your back pocket. Don’t be afraid to put it in front of them to sign. You’ll quickly work out their position.

If you are aiming to raise $1.5 million the hardest part will be getting that first chunk signed away. No investor wants to be the first $50,000, they want to be the last $500,000. So it’s important to lock down some foundation investors, and use them and their name to secure other investors. It’s all part of the gamesmanship and you need to have your strategy down pat before you got out to market.

Once you’ve locked down the funds, management now becomes a priority. Most investors don’t just hand over cash and then walk away. They will set benchmarks, timelines and other KPI’s. You need to keep them in the loop, so regular corporate updates are critical. Ask them what they want to know and how often if you are unsure. Don’t be afraid to ask advice from them, leverage them and their networks as much as possible. You’ll sometimes be amazed at how much of their time they are willing to give.

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By, Neil Steggall

The Barking Mad Blog

http://www.neilsteggall.org/?p=1235

Business Advice with Bite

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How to structure your startup for investment

Most Australian startup’s will never raise a first round of funding. The recent Startup Muster survey puts the number at just 14%. For those startups that do raise a seed round, the chances of securing VC funding at Series A is even lower. Nevertheless, it’s important to understand what potential Angel and VC investors will want to see from a legal standpoint before investing. This article will set out some of those requirements.

 Incorporate!

You’re not going to raise money unless you’re running your business through a limited liability company structure. Better yet, set up a holding company/operating company structure. Investors will invest in the holding company, which will own 100% of the operating company. This structure can protect the assets of the business from risk of seizure, should the operating company be sued.

A small number of more experienced Australian founders are now setting up their company structure in the US, even if they’re running the business from Sydney or Melbourne. If you’re looking to secure investment over in the US, this approach can make a lot of sense. That being said, it’s definitely only worth doing if that’s your goal.

Founder vesting – sensible for founders and investors

The reality is that a startup isn’t worth much, particularly in the early days, if the founders leave. It makes no sense at all to issue yourselves with equity that doesn’t vest over at least a couple of years, and investors know this. The standard startup-founder vesting structure is a four-year vesting schedule with a one-year cliff, meaning you get nothing if you leave before you’ve been working in the startup for at least a year, and you earn the rest of your equity over the four years.

Many VC investors will require founders to “revest” upon investment. This means that even if you’ve been working on your startup for a couple of years before securing funding, you’ll have to work for another four years to get all of your shares.

Founder vesting obviously make sense for investors; they don’t want you ditching the startup two months in, but it also makes sense for founders. If your co-founder leaves the business with his 25% stake fully vested, the business is pretty much guaranteed to fail. You’re either going to end up working away building up the value of his shares while he chills out on the beach, or you’ll end up quitting too. Vesting means he’ll leave with a smaller amount of shares, which is much more manageable.

Preference shares

VC investors will often only invest through preference shares. The basic idea behind a preference share structure is that it gives investors a liquidation preference in the event of a sale. Preference shares are a way of ensuring that investors get repaid their initial investment before founders and employees get anything.

Obviously if you can avoid issuing preference shares, and simply issue ordinary shares, that’s great for you and your co-founders.

Employment contracts

No one ever bothers putting together an employment contract when they first launch their business. Why would you? You’re probably not even paying yourself!

If you’re looking to raise a round, you need to sort out your employment contracts for a couple of reasons. First of all, investors will want to know you’re not just pocketing their hard earned cash; they’ll want you to set out a small salary etc. Most importantly, though, they’ll want to ensure that you’re entering into a non-compete with the company. If you don’t get on with your investors, they don’t want you quitting and setting up a competitor business the next day.

To conclude

Investors are a diverse bunch, so they’re not all going to be looking for the exact same structure before investing. If you’ve got a great team on board and you have significant traction, you might be in a position where you can dictate terms. Unfortunately that’s not very common! It makes sense to structure things professionally and to be pragmatic about what you’re going to offer investors. It might just help you end up as one of the 14% of Australian startup’s who raise a round!

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By, Neil Steggall

The Barking Mad Blog

Business Advice with Bite

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