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4 Tips for Startups Seeking Venture Capital Funding
Startups have a few options when they look to raise capital. Some access debt instruments, like loans, while others might try to raise capital through crowdfunding. One of the most common financing methods startups use is venture capital financing. This is where an investor provides funding in exchange for a stake in the company, referred to as equity.
Venture capital financing is popular among startups, particularly early-stage companies who cannot obtain loans. It also means the company does not have to pay the investor back because the investor receives a piece of the company.
However, there are certain legal considerations to keep in mind when seeking venture capital financing, four of which will be discussed in this article. Remember that a Florida corporate lawyer is essential to making sure a business gets safely and successfully off the ground.
Understand Your Term Sheet
When an investor courts a startup, the two sides negotiate a term sheet. A term sheet is a non-binding document that outlines the terms and conditions of the investment. It is often pages long and complex. Many times, startup founders are caught off guard when they see the term sheet. On the other hand, venture capitalists are seasoned investors who are well-versed in how startups work. This can place startups at a disadvantage if they do not understand the term sheets.
Do Not Give Up Too Much Control
Some startups make the mistake of ceding too much control of the company to venture capital investors. This may be because the owners do not understand the term sheet and/or they are desperate for the money.
However, relinquishing too much control over your company can be a major error for a few reasons:
- It often means the investor has more decision-making power.
- It will leave you with less to offer future investors in later funding rounds.
- It can dilute your stake in the company.
Protect Your Intellectual Property
Another potential pitfall to watch out for is losing your rights to your intellectual property. You may have a trademark, copyright, or patent that is essential to the business. Make sure this intellectual property belongs to the company and is not signed away to an investor.
Be Clear On Your Exit Strategy
Something that early-stage startups sometimes overlook is their exit strategies. The company’s founders need to decide if they ultimately want to sell the company, merge it with another, or go public with an IPO. However, brand-new companies often treat an exit strategy as an afterthought, thinking it can be dealt with down the line. This can become a major problem if your venture capital investor is misaligned with your exit strategy or wants one that is not best suited for you and your company.
Contact an Oakland Park, FL Financing Attorney
Startups often face many legal risks that their founders are not aware of. Venture capitalists, on the other hand, may exploit a company’s vulnerabilities to maximize their investments. That is why an experienced Ft. Lauderdale, FL startup lawyer is key to a startup obtaining venture capital financing safely. At The Elliot Legal Group, P.A., we know all the legal pitfalls and hurdles that can affect a startup during the funding stages. We are also highly experienced in international law and licensed to practice in England and Wales. Schedule a consultation by calling 754-332-2101 today.
