This article was co-authored by Andy Brownstein and Jared Burden.
The typical founder team starts an entrepreneurial venture with limited resources—meaning their own resources. They run a race to get customers to buy their product before the company runs out of cash. They may get an SBA loan, they may get some money from an uncle to tide them over, but at the end of the day they are living life close to the bone in a business that they own free and clear.
For many founders whose businesses succeed, this approach works. They’re able to “bootstrap” their way to success.
But for companies that intend to scale their businesses fast, outside capital from sources other than Uncle Fred is required. Those who succeed at raising third-party money may get it in the form of equity financing from a sophisticated angel investor or venture capital firm, or debt financing in the form of a loan secured by assets, though this is more rare, as most start-ups do not have assets to secure.
In either case, it’s critical that founders get their corporate, financial and legal “house” in order before taking the audacious step of trying to hook a naturally skeptical VC or loan officer. These sources of “smart money” will require that the house is tidy, no matter the stage of construction it’s in.
To be sure, most “fast-scale” ventures that hit the road to find outside capital don’t ever raise it. A very small percentage of small businesses fall into the fast-scale category to begin with, and most that do may have what the founders believe is the “big idea” but can’t get others with money to see the vision. Unfortunately, it’s statistically true that most businesses fail.
But some ventures do get the money they need. And one of the reasons they succeed is they have asked themselves the right questions—the answers to which guide their next steps
Here are 11 issues to consider when getting ready to raise outside capital.
- Are the founders aligned on whether now is now the right time to secure outside capital?
- Do all of the founders contribute to the venture equally in terms of time spent and the value of their contributions?
- If it’s a very early stage company, have the founders signed a founder’s agreement, and does the founder’s equity vest over a period of time in order to maintain the incentive to stay in the game?
- Does the business have the right corporate form in place for the type of capital it seeks to raise?
- Does the business have its key organizational documents—its bylaws, shareholder agreement, or operating agreement—in order?
- Does the company have its intellectual property locked down?
- Are the necessary confidentiality and proprietary rights agreements in place between founders, employees, consultants and investors?
- Is there a capitalization table that clearly reflects the “fully-diluted” ownership interests in the company, and has the company kept track of to whom it has promised equity?
- Does the business have its financial statements ready to convey the financial position of the company?
- Has a realistic and accurate valuation of the business been established, and is the business clear on how much capital it needs to raise?
- Does the business have the right professional advisors with experience helping similarly situated companies in place?
Raising “smart money” is not a decision to make lightly. For some kinds of ventures, there really is no choice but to try. And unless the house is in order, that effort will most likely fail. In an upcoming series of posts, the GreeneHurlocker emerging growth business team will provide insights about these and other necessary considerations for the founding team.
GreeneHurlocker partners Jared Burden and Andy Brownstein have significant experience advising startups and entrepreneurs on a range of legal and business issues. Contact them with questions or if you require assistance.
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