News & Insight

Investment November 18, 2019
Founder mindset when raising from VCs – top 5

Founder mindset when raising from VCs – top 5

Raising VC funds?  Staring at a term sheet?  There are tens if not hundreds of issues that you – as a founder – could be thinking about.

Here’s our take on the top 5…

1 – Don’t freak out

Relax.  Venture capital raising should be a collaborative experience.  You are not selling the company, you are bringing in a business partner.  What was “your” company is about to become “our” company.

Professional asset managers are unlikely to actively screw you over.  VCs manage money for other people.  They don’t get far if they screw people over for a living.   In fact, the opposite.  Having invested the funds, the fund manager won’t have anything to return to its own investors/LPs unless there is an exit (company sale or IPO).  There will be no exit without a properly incentivised management team.  If a VC fund manager never achieves an exit, it won’t raise another fund.

VC investors actively screwing management are edge cases.

Yes, diligence the investor team.  Speak to their portfolio companies (and the ones they didn’t invest in).  Have them take you for dinner, more than once.  Meet their whole team.  Find out where the people you are dealing with sit in terms of seniority at the fund and what proximity they have to the investment committee.  No, don’t freak out about horror stories on the web.

If you are in a position where you can get hold of more than one term sheet (before signing any particular one of them!) then that gives you much more leverage when it comes to points 2, 3 and 4 below.

2 – Raise the funds on somewhere near market terms and get on with it

You have decided to raise venture capital funding.  You have looked at debt, cash flow, grant money, credit cards, etc.  You think venture capital is the best available option.  Now get on with it.

Get that cap table into circulation and agreed.  Review that term sheet and get comfortable with what it says and which points you aren’t comfortable with.  Every VC firm has different deal terms.  If you have co-investors on the same deal then deal terms will need to be blended.  No two deals have exactly the same terms.  Ever.

If for every deal term you are looking for a binary right or wrong answer applicable to all deals then you won’t find it.  And you will be wasting time.  And you will be paying the lawyers to waste their time explaining to you why there is no binary answer.

Much more important is to work to understand why the terms put forward are required by that VC and what the consequences and risks are for you.  Be aware that your competition will also be raising.  If they are raising in the States then they are raising a larger cheque than you.

Be aware that even the most straightforward and smooth deals take at least five weeks to close after signing the term sheet.  And before that you might have been talking to the investor for months.

Be aware that all the time you are negotiating and dealing with deal admin, your eye is off the ball from a business perspective.   And your competition that just raised are busy scaling their business.

Also guard your own equity with your life, but that’s a different post on valuation and dilution…

3 – And negotiate…

Spending six months negotiating the workings of the leaver mechanics – for example – in your articles of association is bad strategy.  If you don’t leave the company pre-exit, they might never be invoked anyway.  Or the provisions might well be tweaked or replaced on the next round.

But there are always specific points where your position could be improved.  Look at it as you would a game of giant Jenga.  Be careful which blocks you try to pull out.  Leaver mechanics are complicated – see our deep dive on the subject from earlier this year here.

And so, there is a balance to be struck – work out the handful of points that are genuinely, commercially, important.  Fight for those.  Be careful spending time, energy and cost understanding and then fighting edge cases.  Everything is negotiable.  Don’t negotiate everything.

4 – Control your cap table…

You don’t have a deal unless it can be mapped out as a cap table in Excel.  That means the allocation of equity between everyone involved.  Ideally it also means deal costs and funds flow.

Why spend considerable time, energy and cost reading and negotiating legal documents if there is no cap table?  Your investors put together cap tables as a profession.  Push them to do it.  If they can’t, or they won’t, then do it for them and push them to agree.  If that still doesn’t get the deal moving then you probably don’t have a deal at all.  And you are wasting costs on lawyers and probably your time on that investor.

A cap table wire frames the deal and the quality of the cap table is by far the greatest single factor in a smooth and fast deal process.

5 – Lawyer-up

Just about any lawyer can pick up a document, read it for you, correct the grammar and tell you what is in it and then start thinking of holes in the logic and bits of the drafting that can be improved or tweaked to clarify.  This is a necessary skill-set for a lawyer.  Very few lawyers have a problem advising their clients at this micro-level.  But it is not a sufficient skill-set for a VC lawyer, not even close.  In fact, that kind of micro-thinking – in a vacuum – will hold up deals and infuriate.

The most valuable advice a seasoned VC lawyer can give is in relation to points 1 to 4 above.  She or he spent years in law school and then gathering experience on deals so that you don’t have to.  An expert knowledge of the applicable law is a necessary condition, but so too is the ability and experience necessary to use that knowledge surgically so as to protect your interests and get the deal done.

You want someone in your corner who knows you, who knows the history of the company.  Who is on your side.  Your lawyer as a trusted advisor is a good person to be filling that role.  And get used to filling these kinds of advisory roles, there are other seats to fill – CFO, Head of Sales, NXCs, NEDs, etc.  Take the same care in building your advisory team as you would your tech architecture.

This piece was prepared by Henry Humphreys.  All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice.  None of the above should be relied upon.  Always seek your own independent professional advice.

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