Fundraising is critical to starting new businesses. No matter how disruptive and revolutionary the innovation is, if your startup doesn’t have a clear fundraising strategy, it can go down the drain.
Finding an investor is a very competitive and not easy process, especially in Israel, the “startup nation”, where startup ideas flow like water, and anyone can wake up one morning and think they have an idea for a company that no one has thought of before.
The Tech Angels, venture capital firms, are the most prominent players in high-tech investing. Their model is simple: here is the financing and, in return, we want to receive a certain percentage of the company’s shares and have certain rights in it, such as: appointing a member of the board of directors. Others will demand a veto when it comes to big decisions, such as the appointment of a new CEO or technical director, or when it comes to a public offer for sale.
The risk assumed by venture capital funds is great, since the vast majority of companies do not recoup their investment. In Israel, for example, according to unofficial data, around 96% of startups fail. However, once a startup is successful, it recoups its venture capital investment and much more, covering its losses.
Once the desired moment has been reached, and a VC or some private investor, has decided to invest in your company, along with all the happiness and joy that the founders are feeling at that moment, they should sit down together and set the guidelines for effective negotiation with the investor.
What are the reasonable requirements and red flags that could significantly harm your rights and interests in the company in the future.
How should you prepare before entering into negotiations for a stock purchase agreement?
When a startup is in its early stages, their bargaining power is likely to be small, seasoned VCs and investors have templates of agreements and terms and conditions, they are bringing each negotiation, which saves them a lot of time and money, but allows relatively little leeway for startups, on the other hand.
However, you should formulate some guidelines and red flags, which will guide you when you come to any trade with an investor, as follows:
Create a capital table and a shareholder register: One of the most important things to trade is a neat register and a capital table, which will describe in detail how many shares each shareholder has, how many options are assigned to each employee, director of shareholders and each future right to the allocation of a share. In addition, the equity table will describe the value of the company on a fully diluted basis.
Valuation of the company – It is difficult to estimate the value of the company, especially in its early stages, however, you must reach the negotiation with a valuation carried out by professional business evaluators to carry out effective negotiations, since the investment must be made for the value of the company. The fund will also come with its valuation, and usually at the end the final valuation will be determined during trading.
Make sure that all shareholders and employees give up the intellectual property of the company – One of the most important things for both the company and the investor is to make sure that each employee, director or shareholder gives up their intellectual property rights in the company , such as inventions, patents and trademarks, to prevent future claims and lawsuits and protect the rights of the company and its investors.
Make sure that the conditions set by the investor do not significantly restrict the entry of a future investment – The start-up and the company should always prepare for additional investors, so the company should go through all investment documents thoroughly, and make sure that they will not cause investors to refrain from investing in the company,
It is true that the bargaining power of startups, especially in their early stages, is weak, but the company has yet to enter the negotiations with some basic guidelines and principles, which will allow it to better negotiate and protect its rights. In any case, it is highly recommended to consult an experienced lawyer, who brings a legal point of view to the table, who will explain the full meaning of each clause and ensure that the negotiation is quick and effective.
