While you may want to straight-up start raising venture captial for your company, it’s better to prepare yourself with everything that you will need so that you don’t look incompetent or worst yet, make mistakes that cost you money and reputation.
In this article, we will discuss everything you need to start raising funds for your startup.
Choosing A Venture Capital Lawyer
Hiring a good lawyer to help you with preparation is a good upfront investment that will help you avoid common mistakes. Keep in mind that, there are other people who have raised more money and multiple rounds of funding well before you. All the issues that you are going to face have already been solved by someone, so there is no reason to “try things out” when it comes to preparing for all your legal paperwork. So, hire a lawyer!, but what should you look for in a lawyer? Keep in mind, the lawyer is going to be a representative of your company, your brand, and you. so you should be careful on who you hire. Here are some guidelines:
Experince: You might be nice and allow a lawyer who just graduated or a friend to help you with preparation, but that’s a very big mistake. You should hire someone who has done this before because, they will cost you less in long term, they already know the “issues” to look out for. You can go for a solo practitioner or a firm, but make sure that they have at least 5+ years of experince.
Hourly Cost: Don’t worry about the hourly cost. Many entrepreneurs hire the wrong kind of lawyer to lower their hourly rates. ( Like hiring a Real Estate Lawyer for Half the typical hourly fees ) You want someone who is very competent with what they do. So look for lawyers who specialize in early-stage financing.
Communication: You need to be comfortable with the type of communication you will have with this lawyer. Are they going to reply to your text? Are they on your side? Are they just looking to increase their billable hours? Are they actually advising you as a friend or just doing the basics?
Incorporation Of Business
Many investors will not bother with your company if you have incorporated with LLC or something similar because its a hard pass-thru for tax reasons. You should get a C Corporation In Delaware. C-Corporation is a must.
All owners pay tax on the annual earnings of the company, regardless of whether they receive a distribution or not. This is a major reason investors prefer C corps: they only need to worry about paying tax for the money they actually receive.
Why Delaware? First, because there are no investor who has rejected a Delaware Incorporation. Second, Delaware has Favorable business tax laws and a dedicated business court if there is any litigation that may arise. Yes, there are companies that are incorporated in other states that get funding but they get rejected for various reasons.
Data Site: All Your Paperwork
A data site is simply a site where you put all your important documents for investors to review. These documents will help investors do their due diligence. If you make it easy for them, they can respond faster and close the deal. This could be some expensive enterprise-level data storage or something as simple as Dropbox, Box, Google Drive, etc.
What should this data site have?
- Original Organization Document
This is a document that shows your company’s name, EIN information, when it was filed, by who.
- Certification of Incorporation
This is a certification letter your receive once your organization has been incorporated. So if you incorporate in Delaware, you will receive a certificate from secretary of state.
Bylaws are just a list of rules that your company will function thru. It’s used to regulate itself. Some companies might not have this and you may want to create one to keep founders, and initial angel investors’ interests aligned.
- All Board/Shareholder Actions and Minutes
There is just “minutes” meeting notes on what happened on each meeting, what did you discuss, and how often you meet up for board meeting.
- Capital Stock Documentation
- Capitalization Table, ” Cap Table”
This is a list of record that shows who owns how much of the company.
- Financial Records, Budgets, Major Customers and Employment Agreements
Intellectual Property (IP)
Investors love a company that has “Intellectual Property”, it shows them that it’s unique. This is always a PLUS point when raising money for your company.
Often, when people hear “Intellectual Property”, people think of trademarks and patents, which is true but “IP” is anything that a company secret. It can be your “code”, it could be that secret ingredient. All of that is IP. You need to make sure that everyone who has come in contact with your IP has signed the agreement, this is going to boost investor confidence.
A common issue that we see with IP is that startup founders being employed by a company when they founded a company or wrote a program while being employed by another company, in this case, the previous employer could make claims.