Venture capital & PRIVATE EQUITY

5 Things you should consider before asking for investments

There are many ways to get investments in your project, however the most effective way is to ask venture capitalists. There are seven tips you should consider before you going to ask for investments.

Private Equity Investments: Overview

I. Bank loan

If you are an entrepreneur looking for investments, you have several options. From the one hand, you can go to the near bank office. The bank will ask you to show the business plan and, what is more important, will look at your shoes. Good clothes open all doors. Speaking frankly, the bankers usually ready for investments by providing you a credit line if you have something behind your shoulders, such as assets that could be sold by the bank in case of insolvency. Usually, entrepreneurs cannot afford to show assets or persuade the bankers that their technology could be high valued. Specifically, if we are talking about startup, such assets could be risky for bankers. From the other hand, you can try to ask investments through crowdfunding platforms.

II. Crowdfunding

Crowdfunding investments refer to the practice of funding a project or venture by raising small amounts of money from a large number of people, typically through an online platform. Crowdfunding can be used to fund a wide range of projects, including creative endeavors, social causes, and business ventures. Investors typically receive some form of reward or equity in exchange for their investment, depending on the type of crowdfunding campaign. Crowdfunding has become increasingly popular in recent years as a way for entrepreneurs and small businesses to raise capital and bypass traditional funding sources such as banks and venture capitalists. However, crowdfunding investments are generally considered to be higher risk than traditional investments, as many crowdfunding projects fail to meet their funding goals or do not achieve the expected returns.

A bargain is a bargain. All is about the money. However, no need to be disappointed. God helps those who help themselves. That is why you need to look for another options to grow your business. And here we are -- at private equity investments.

III. Private Equity

Private equity investments refer to investments made in privately held companies that are not publicly traded on a stock exchange. Private investors, such as venture capitalists, venture funds or venture syndicates typically invest in companies that have high growth potential and are looking to expand or make strategic acquisitions. Unlike public companies, private equity investments are not subject to the same level of regulatory oversight and are often held for a longer period of time before being sold or taken public.

Usually, you should start to look for investments through a private equity by searching guys who invest or ready to invest in the same 'risky' ventures, such as:

(i) 3F: Family, Friend and Fools.
Family, friends, and fools (FFF) raising investments refers to the process of seeking funding from people close to the entrepreneur, such as family members, friends, or acquaintances. These individuals are often willing to invest in the entrepreneur's business idea based on personal relationships and trust, rather than a detailed analysis of the business plan or financial projections. FFF investments are typically smaller amounts and are considered a form of seed funding to help the entrepreneur get their business off the ground.

(ii) Accelerators
Startup accelerators are programs that provide mentorship, resources, and funding to early-stage startups in exchange for equity. These programs typically run for a fixed period of time, ranging from a few months to a year, and aim to help startups accelerate their growth and achieve key milestones. Accelerators often provide startups with access to industry networks, investor connections, and training in areas such as business strategy, marketing, and product development. The ultimate goal of a startup accelerator is to help startups become investment-ready and achieve success in their respective markets.

(iii) Angel Investor.
An angel investor is an individual who provides financial backing to startups or entrepreneurs in exchange for equity ownership in the company. Angel investors typically invest in early-stage companies and provide funding to help them grow and develop. They often have experience in the industry and can provide valuable advice and guidance to the entrepreneurs they invest in.

(iv) Venture Capitalist.
A venture capitalist, on the other hand, is a professional investor who manages a fund that invests in startups and early-stage companies. Venture capitalists typically invest larger amounts of money than angel investors and are more focused on high-growth potential companies. They also provide strategic support and guidance to the companies they invest in, with the goal of achieving a significant return on their investment.

(v) Venture Syndicate.
A venture syndicate is a group of investors who come together to collectively invest in a startup or early-stage company. The syndicate may be led by a lead investor who sources the deal and negotiates terms with the company, and other investors can then choose to participate in the investment. By pooling their resources and expertise, the syndicate can provide the startup with a larger amount of funding than any individual investor could provide alone. Additionally, the syndicate members can bring their diverse skills and networks to support the company's growth and success.

(vi) Venture Funds / Venture Capital Firms.
A venture fund is a type of investment fund that pools money from investors and uses it to invest in startups and early-stage companies. These funds are typically managed by professional fund managers who have expertise in identifying promising investment opportunities and managing risk. Venture funds typically take an equity stake in the companies they invest in, and may also provide additional support such as strategic guidance, mentorship, and access to networks of industry contacts. The goal of a venture fund is to generate a return on investment by helping its portfolio companies grow and succeed, and eventually exit through an IPO or acquisition.

(vi) IPO
An IPO, or initial public offering, is the process by which a privately held company offers shares of its stock to the public for the first time. This allows the company to raise capital from a wider range of investors and provides liquidity to existing shareholders. An IPO typically involves a company working with investment banks to underwrite and sell its shares to the public on a stock exchange. Once the shares are publicly traded, the company is subject to increased scrutiny and reporting requirements from regulators and investors.

IPO is the highest level of doing business because when the business goes to IPO it means that your business is offering shares in exchange for money to unlimited people. An IPO can be costly and usually for well doing businesses.


Five things you should consider before asking for investments

  1. Fund Raising Materials
  2. Term Sheet
  3. Cap Table
  4. Capital Structure
  5. Debt Instrument

1. Fund Raising Materials

1.1. Pitch
A startup pitch is a presentation given by an entrepreneur or startup founder to potential investors, customers, or partners in order to persuade them to support their business idea or product. The pitch typically includes information about the problem the startup is solving, the market opportunity, the team, the product or service, and the potential for growth and profitability. The goal of a startup pitch is to convince the audience to invest in or partner with the startup, or to become a customer.

1.2. Financial Model
A financial model of a startup is a detailed plan that outlines the expected revenue, expenses, and cash flow of the business over a certain period of time, usually three to five years. It includes projections for sales, costs of goods sold, operating expenses, capital expenditures, and financing activities. The financial model is used to estimate the startup's profitability, cash burn rate, and funding needs. It is an essential tool for investors and stakeholders to evaluate the viability of the business and make informed decisions about investing or partnering with the startup.

In addition to creating a financial model, startups also need to conduct TAM (Total Addressable Market) and TOM (Total Obtainable Market) research to determine the size and potential of their target market.

TAM research involves analyzing the total market demand for a particular product or service, including all potential customers and competitors. This helps startups understand the overall market opportunity and potential revenue.

TOM research, on the other hand, focuses on the specific segment of the market that the startup can realistically capture. This involves analyzing factors such as customer demographics, behavior, and preferences, as well as identifying potential barriers to entry and competitive advantages.

Combined with a financial model, TAM and TOM research can provide startups with a comprehensive understanding of their market potential and help them make informed decisions about their business strategy and funding needs.

1.3. Business Plan: do startups need it?
A business plan is a comprehensive document that outlines a startup's overall strategy, including its market analysis, financial projections, and marketing plan. It is typically a detailed, formal document that is often required by investors or lenders.

In contrast, a lean startup approach focuses on creating a minimum viable product (MVP) and testing it with customers to gather feedback and iterate quickly. This approach emphasizes agility and flexibility, with the goal of creating a sustainable business model through rapid experimentation and adaptation.

While both approaches are valuable for startups, they serve different purposes. A business plan is useful for securing funding and outlining a long-term strategy, while a lean startup approach is focused on quickly testing and validating ideas to create a successful product or service.

2.Term Sheet
A term sheet is a non-binding agreement between a startup and an investor that outlines the basic terms and conditions of an investment. It typically includes details such as the amount of funding, the valuation of the company, the type of securities being issued, and any special provisions or conditions. A term sheet serves as a starting point for negotiations and can help both parties understand the key terms of the investment before moving forward with a more detailed agreement.

The term sheet usually can be drafted by your lawyer as a 'letter of intent' (LoI) or 'memorandum of understanding' (MoU). There are some legal differences, but in the overall picture it does not make sense.

What you need consider in the term sheet, letter of intent or memorandum of understanding?

  • Investment amount: This is the amount of money the investor is willing to invest in the startup.
  • Valuation: This is the pre-money valuation of the startup, which determines the percentage of ownership the investor will receive in exchange for their investment.
  • Type of shares: This refers to the type of shares being issued, such as preferred shares or ordinary shares.
  • Board composition: This outlines the number of board seats the investor will receive and whether they will have any special voting rights.
  • Liquidation preference: This specifies the order in which investors will be paid back in the event of a liquidation or sale of the company.
  • Anti-dilution provisions: These protect investors from dilution of their ownership stake in the event of future fundraising rounds at a lower valuation.
  • Vesting: This outlines the vesting schedule for any equity granted to founders or employees.
  • Information rights: This outlines the level of information that investors will have access to, such as financial statements and operational updates.
  • Restrictive covenants: These are restrictions on the actions that the startup can take, such as limitations on raising additional funding or entering into certain types of contracts.
  • Exit strategy: This outlines the potential exit strategies for the company, such as an IPO or acquisition, and how investors will be paid back in those scenarios.

3.Cap Table
A cap table, short for capitalization table, is a spreadsheet or document that outlines the ownership structure of a startup. It lists all the stakeholders who own equity in the company, including founders, investors, and employees, and their respective ownership percentages.

The cap table also includes information on the type of securities issued, the amount paid for those securities, and any dilution that may occur due to future fundraising rounds or stock options granted to employees. A well-maintained cap table is essential for startups to manage their equity and make informed decisions about future fundraising and exits.

4.Capital Structure
There are two basic legal forms for doing business: limited liability company corporation.

LLC (Limited Liability Company) and corporation are two different types of business structures. LLCs are considered a hybrid between a partnership and a corporation, while corporations are separate legal entities from their owners.

The main differences between an LLC and a corporation is the way they are structured. In some countries, such as the United States, there are differences on how LLC is taxed. LLC is a form usually created for small businesses or family business. LLC has not option to issue unlimited number of shares, different class of shares (voting vs. non-voting), and it usually limits quantity of members (e.g. not more than 50 members).

LLCs can be managed by their owners, known as members, or by appointed managers. Corporations, on the other hand, have a board of directors who make major decisions and oversee the company's management.

In terms of liability protection, both LLCs and corporations offer limited liability protection to their owners. This means that the owners' personal assets are protected from business debts and lawsuits.

LLCs may be more suitable for small businesses or those with fewer owners, while corporations may be better for larger businesses or those planning to go public.

Type of Shares offered

Preferred non-voting shares and common voting shares are two different types of shares that a company may issue. The main differences between these two types of shares are as follows:

  • Voting Rights: Common voting shares typically come with voting rights, which allow shareholders to participate in the decision-making process of the company. Shareholders holding common voting shares can vote on matters such as electing the board of directors, approving major corporate actions, and making changes to the company's bylaws. On the other hand, preferred non-voting shares do not have voting rights, meaning the shareholders holding these shares cannot participate in the company's decision-making process.
  • Dividend Preference: Preferred non-voting shares generally have a dividend preference over common voting shares. This means that if the company distributes dividends, preferred shareholders will receive their dividends before any dividends are paid to common shareholders. Preferred shareholders usually have a fixed dividend rate or a formula to calculate their dividend payments, while common shareholders may receive dividends based on the company's profitability and discretion.
  • Liquidation Preference: In the event of a liquidation or winding-up of the company, preferred non-voting shareholders typically have a higher priority in receiving their investment back compared to common voting shareholders. Preferred shareholders have a predetermined liquidation preference, which ensures that they receive their investment amount or a certain multiple of it before any distribution is made to common shareholders.
  • Conversion Rights: Preferred non-voting shares may have the option to convert into common voting shares at a predetermined ratio or under specific conditions. This conversion feature allows preferred shareholders to participate in the company's decision-making process if they choose to convert their shares into voting shares.
  • Risk and Return: Preferred non-voting shares are generally considered less risky than common voting shares. Preferred shareholders have a higher claim on the company's assets and earnings, and they receive their dividends and liquidation proceeds before common shareholders. However, preferred shareholders may not benefit from the potential increase in the company's value as much as common shareholders, as they do not have voting rights and may not participate in the company's growth.

It is important to note that the specific rights and characteristics of preferred non-voting shares and common voting shares can vary depending on the company's articles of incorporation, charter, bylaws, and any shareholder agreements in place. It is recommended to carefully review the company's governing documents and consult with legal professionals for a comprehensive understanding of the rights and differences between these types of shares.

5.Debt Instrument

There are several debt instruments that are commonly used to attract private equity investments:

5.1. Convertible debt.
Convertible debt is a type of debt instrument that can be converted into equity at a later stage, usually at the option of the investor. It is often used by early-stage companies to raise capital from investors who are willing to take on more risk in exchange for the potential for higher returns. Convertible debt typically has a lower interest rate than traditional debt, but also includes a conversion feature that allows the investor to convert the debt into equity if certain conditions are met, such as the company reaching a certain valuation or raising additional funding. This allows the investor to potentially benefit from the company's growth and success, while also providing some downside protection in case the company fails to meet its targets.

Convertible notes are short-term debt instruments that can be converted into equity at a later stage. There are hybrid convertible debts and notes developed by American lawyers for local US market but popularised in other jurisdictions, such as SAFE (Simple Agreement For Future Equity) or KISS.

Please note, that drafted American documents could not be suitable for you if your company is in the UAE, or other European jurisdiction (not a common-law jurisdiction) where many concepts are illegal.

5.2. Share purchase agreement.

A share purchase agreement (SPA) is a legal contract between a buyer and a seller that outlines the terms and conditions for the purchase and sale of shares in a company.

The purpose of a share purchase agreement is to protect the interests of both the buyer and the seller by clearly defining their respective rights, obligations, and responsibilities. It helps ensure that the transaction is conducted in a fair and transparent manner, minimizing the potential for disputes or misunderstandings.

Overall, a share purchase agreement is a crucial document that facilitates the transfer of ownership in a company's shares and provides a legal framework for the transaction. You can consider to sell preferred or ordinary shares.

5.3. Warrants.
A warrant share refers to a type of financial instrument that gives the holder the right, but not the obligation, to buy a specific number of shares of a company's stock at a predetermined price (exercise price) within a specified time period. Warrant shares are typically issued by companies as a way to raise additional capital or as part of a financing arrangement.

Warrants are similar to stock options, but there are a few key differences. Firstly, warrants are typically issued directly by the company, whereas stock options are often granted to employees or executives. Secondly, warrants have a longer expiration period compared to stock options, which are usually shorter-term. Finally, warrants are generally traded on public exchanges, allowing investors to buy and sell them like any other security.

When an investor exercises a warrant, they purchase the underlying shares from the company at the predetermined exercise price. The exercise price is usually set higher than the current market price of the stock at the time of issuance, giving the warrant holder the potential to profit if the stock price increases.

Warrant shares can be an attractive investment for investors seeking exposure to a company's stock at a potentially lower cost than buying the shares directly in the market. However, warrant shares also carry risks, as their value is dependent on the performance of the underlying stock and may expire worthless if not exercised before the expiration date.

It is important to carefully review the terms and conditions of warrant shares, including the exercise price, expiration date, and any additional provisions, before investing. Consulting with financial professionals can provide further guidance on warrant shares and their potential benefits and risks.

It's important to note that the choice of debt instrument will depend on factors such as the company's financial situation, growth plans, and risk appetite of the investor.
How can we help?
As a law firm specializing in venture law and startups, we offer a range of services to assist entrepreneurs and investors in navigating the complex legal landscape of the startup ecosystem. Our team of experienced attorneys can provide comprehensive legal support throughout the lifecycle of your venture, from formation to exit.

1. Entity Formation: We can assist in selecting the appropriate legal structure for your startup, whether it be a corporation, limited liability company (LLC), or partnership. We will guide you through the process of drafting and filing the necessary documents to establish your entity.

2. Financing and Fundraising: Our venture and startup lawyers have extensive experience in assisting startups with various financing rounds, including seed funding, angel investments, venture capital, and crowdfunding. We can help negotiate and draft term sheets, investment agreements, shareholders agreements, cap tables and other financing documents to ensure your interests are protected.

3. Intellectual Property Protection: Protecting your intellectual property is crucial in the competitive startup landscape. Our firm can assist with trademark and copyright registrations, patent applications, trade secret protection, and intellectual property licensing agreements.

4. Contracts and Agreements: We can draft and review a wide range of contracts and agreements that are essential for startups, including founder agreements, employment contracts, non-disclosure agreements (NDAs), customer agreements, and vendor contracts.

5. Compliance and Regulatory Matters: Our team can guide you through various compliance and regulatory issues that may arise during the course of your startup's operations. This includes securities compliance, data privacy laws, employment regulations, and industry-specific regulations.

6. Mergers and Acquisitions: If you are considering an exit strategy through a merger or acquisition, our attorneys can provide guidance throughout the transaction process. We can assist with due diligence, negotiation of terms, drafting of acquisition agreements, and closing the deal.

7. General Counsel Services: As your startup grows, we can serve as your trusted legal advisor, providing ongoing counsel on a wide range of legal matters. Our attorneys can help with corporate governance, employment issues, contract negotiations, and other day-to-day legal needs.

If you require any further information, please contact us and ask for advice (hit the red button below).