Raising 'Venture Capital'
In the US, Venture Capitalists usually
wants a 10x return in five years. For this, they give you money
for a percentage of what they think the company will be worth
THEN. If they think your business will be worth $20 million in
five years and they give you $5 million, they will want 25% of
the company. They will also want certain control. They may place
their management into the company if you do not have an experienced
team in place.
The ten steps of a transaction
- 1.) Finding Investors who are willing, capable, and
a good fit.
At this very first stage of a transaction, you must establish that
the investor has the financial capability to do the deal, and is
seriously interested in proceeding with a transaction.- 2.) Introducing Your Company
Your goal at this stage, assuming you have bona fide investors in
front of you, is to give them enough information about your
business to motivate them to want to proceed with more in-depth
discussions, leading to negotiation of an offer to invest.- 3.) Maintaining Confidentiality
Most companies have confidential aspects to them--trade secrets,
strategic plans--that they do not want revealed to just "anyone."
It can be harmful to have certain types of information fall into
the hands of competitors; there may be sensitive financial matters
that the owners of the company do not want generally known.- 4.) The Meeting(s)
- 5.) Getting Down To Terms (and Getting Your Attorney Involved).
If all goes well in the meetings with the investors, things will
progress to the point that one side or the other will want to
suggest the basis structure of the deal, which is often referred to
as preparing a term sheet. The term sheet can be a very brief,
bullet point statement of how much money the investors would put
in, what equity share they would receive, the time frame for
completing their analysis of the company and getting the formal
documents ready in preparation for closing the transaction, and
other basic terms.- 6.) Due Diligence...Definitely a Two-Way Street
The term sheet will normally state that acceptance of the deal by
the investors is subject to completion of "due diligence." This
amounts to the investigative phase of the transaction, in which the
investors looks into your company, its records, its history, and
financial condition in great depth.- It is vitally important that the entrepreneur recognizes his/her
right to ask questions of the investors, too. Due diligence is a
mutual exchange of information. Here is your chance to ask enough
questions to satisfy yourself that these people will make good
long-range partners for you. Asking about other deals they have
made, asking for business references, the names of CEOs of other
companies they have invested in--these are all necessary steps to
go through. A simple, but very useful question for you to ask the
investor is: Where did you make your money? or, Where does your
funding come from? If you find out they have never been involved
in a venture capital-type transaction before, it is reasonable to
wonder whether they will be able to endure the inevitable ups and
downs of small company ownership.- 7.) The Letter of Intent and Your Response
As the transaction moves toward a close, the documentation that is
passed back and forth from the investors to the entrepreneur,
becomes more specific and detailed. The next formal document after
the term sheet is usually called the letter of intent.- 8.) The Purchase Agreement
- The closing documents bind both parties to completing the
transaction. Among the documents is the stock purchase agreement
(in the case of an equity transaction). This document contains
legal language that ensures the transaction is in compliance with
securities laws.- 9.) To Close or Not to Close
Now you are at the point of no return: if you sign the documents
and accept the funds, you are in business with new partners--they
own part of your company, in effect part of you if the company was
your "baby."- 10.) Fear and Loathing Prior To Closing
Worrying about whether an investor is going to actually write a
check is a situation all capital seekers find themselves in. You
should never count on investors' commitments until their check
clears the bank.
Bizology - the study of business for sale
Bizology.com email to : info [at] bizology [dot] com Chambersburg, PA 17201-1712 | buying a business | buying vs leasing | construction loan hints | financing a business | | SBA loan hints | structuring the business purchase | venture capital | angel investors | | FINANCE INDEX | you are in finance now | MAIN INDEX | * FOR SALE * BUYING * SELLING * FORMS & CONTRACTS * REFERENCE * TAX - LEGAL *