Venture Capital Financings Guide For Startups

Most often than not, most startup companies would seek out seed funding from venture capital firms at the onset of their businesses. These venture capital firms not only could offer capital but also strategic assistance that can lead to potential partners and customers, as well as other relevant and essential requirements for their company to grow in the future. Especially in the United States, the venture-capital industry is envied throughout the globe as an engine of economic growth.

Securing funding from these firms is not easy, so startup companies must present their ideas and investment planning spot on. Early on, they must anticipate all possible questions and scenarios from the people of these firms. They’ll be very inquisitive of all the aspects of the business model since they’ll be risking a huge amount of money on their part. These firms would obviously want an idea or product to be a win-win for both of the parties involved.

So, let’s look at some of the ins and outs of venture capital financings for startups.

Securing Venture Capital Financing

In obtaining venture capital financing, it is important for startup companies to understand the things that these firms typically focus on. Some of these include specific industry sectors like digital media, software, mobile devices, etc. Then they’ll look at the stage of the company, such as Series A rounds or early-stage seed, as well as later-stage rounds, which are companies that have achieved revenues and traction.

Venture Capital Term Sheet

Initially, in most venture capital financings, the firms will present their term sheet to the entrepreneurs. It is an important document as it is a gesture that shows the firm’s interest and commitment for an investment and would want to proceed with other processes required. Term sheets are not a guarantee for consummated deal, but a high percentage that were finalized and signed resulted in completed financings.

Company Valuaton

A critical point for both the entrepreneur and venture capital investor is the valuation of the company presented. It’s also referred to as the pre-money valuation, which points to the agreed-upon company value prior to the addition of the new capital or money loans. Valuation is negotiable. However, the higher the valuation goes, the less dilution the entrepreneur would run into. Some of the factors that could decide the value of a company include market opportunity size, recurring revenue opportunity, capital efficiency, current economic climate, and others.

Structure of Venture Capital Investment

Startup founders typically hold common stocks in the company, and venture capitalists or Angel investors will usually invest in a company in a number of ways. First is through SAFE or Simple Agreement for Future Equity, which has no maturity and interest. Second is through a convertible promissory note issued by the company, which is then converted into company stock in its next round of investment, but unlike SAFE, this type of financing has a maturity date as well as a 4% to 8% interest rate. The last one is through a convertible preferred stock investment, which gives the investor rights, preferences, and privileges stated in the company’s certificate of incorporation.

Confidentiality

Venture capital investors will typically stipulate on a binding provision in the term sheet that the terms and existence of such legal document, as well as the fact that negotiations are ongoing, shall be kept strictly confidential. These conditions can only be disclosed without the investor’s consent to the company’s directors, officers, and attorneys. The company will need to notify any of the parties about the confidentiality obligation of the term sheet.

Venture Investors Expenses

In the term sheet, it will typically include a commitment from the company to compensate the reasonable legal fees on the investors, as well as any due diligence and costs incurred, which are payable at the closing transaction. This obligation is usually capped at a specific dollar amount. However, this is taken into consideration if the negotiation requires more legal work and time.