Many startups see venture capital financing as a sexy way to raise funds and it has become more available in recent years. In fact, last year was a record year for VC investment.
VC or venture capital is a type of financing that relies on private investors who invest funds into a startup in exchange for equity. This is attractive to some startups because it is available at the company’s early stages before the company is profitable.
The Advantages of VC Funding
- You’re in a better position to raise funds from the same VC the next time you need funds.
- It attracts other investors because it provides social proof to other investors that your startup is worth investing in.
- Your investors might also provide support and expertise.
- It gives you access to their networks, creating a potential pool of customers or consultants for the company.
- VC funding is not a loan so you don’t have to pay the investors back in cash if your company can’t, and there is no maturity date for it.
The Drawbacks of VC Funding
While VC funding is attractive to startups due to its host of advantages, it’s also not without its drawbacks, which include:
- It is a lengthy process.
- It’s highly competitive.
- VC contracts might stagger funding.
- Some investors might want to manage your startup.
Legal Issues and Considerations for VC Financing
The cost of equity is almost always going to be more expensive than debt. While you’re not paying back the money out of pocket as cash with equity, you’re essentially promising to indirectly share your future profit with investors.
If too many governance rights are provided in the early stages to investors, founders can lose control over important decisions in their company. It’s therefore important that founders have long-term plans regarding the key control terms. Founders can negotiate some structural protections to limit the investor’s power to force the sale of a startup.
Ultimately, having agreements and writing promotes certainty and enforceability. Contracts can and should be used as business documents to help guide and enforce those business relationships.
Tips for VC Investing Success:
- Plan for the long term as best you can.
- Find the right investment fit.
- Hire an attorney that can help represent your company and navigate you through these things.
- Focus on what you do best and outsource the rest.
- Don’t be afraid to fail.
If you want to learn more about VC financing tips and tricks, check out https://cgl-llp.com/podcasts/cgl034.
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