Want to raise money? Here are 7 things you should know

When starting a business, it's important for the founder to establish what constitutes a successful outcome. While it is every founder's dream to see his company become a monopoly, it might take a long time, even for a successful business, to accumulate sufficient capital. Understanding proper due diligence, valuation studies, and other investment-related paperwork, as well as having a positive mentality and a firm grasp of organisational structures and processes, are all crucial for founders.

HERE’S WHAT YOU NEED TO BE PREPARED FOR:

1) Patience, contingencies, and humility

Fundraising could take as long as a year depending on the many post-commitment conditions that must be met. This could involve things like sales quotas, market trends, and even legal requirements. As a result, it is important to spend time planning the round so that your 'offer' for the firm remains reasonable. For any potential backer, a startup whose founders can't adequately explain why they need so much money is a warning flag. There are enterprises that require more funding at an earlier stage than others, and there are others that require more funding at a later time, but seasoned investors can immediately spot the ridiculous. Clearly define the purpose of the cash you are seeking, how soon you will need them, and what you intend to do with them.

2) How you raise funds is important

Debt finance is not an option for startups because of the inherent volatility and accompanying risk that comes with them. However, equity financing has undergone significant change in recent years, and it is now possible to strike a balance between the needs of startup founders and those of investors. By subscribing to the equity share capital, Compulsory Convertible Preference Shares (CCPS), or Compulsory Convertible Debentures (CCD), an angel investor or venture capitalist can now invest in the company. Owning equity shares does not guarantee a specific rate of return or grant any preferential treatment. However, the last two choices (CCPS and CCD) are hybrids that appeal to both the entrepreneurs and angel investors/venture capitalists. By issuing convertible instruments, founders can maintain management and decision-making power over the business. The India Simple Agreement for Future Equity (I-SAFE) is yet another instrument. Upon the occurrence of certain events, as agreed upon by the investor and the founder, this hybrid instrument can be converted into stock. Being aware of the impact that proposed changes could have on the company is essential.

3) The importance of legal and financial support

All the foregoing situations call for legal knowledge, especially when it comes to clearly conveying those details to investors and other founders. The assistance of a qualified CPA, secretary, and attorney will guarantee that the business is structured legally and methodically. The valuation of a firm, or the amount of equity the founders are willing to give up, is also influenced by the expertise of these individuals.

4) Robustness of valuation reports

The ceiling price of the company's stock will be established by the results of a professional valuer's report. The founders and investors will have a mutual understanding of the appropriate valuation for various stakes in the company. This makes soliciting donations easier and provides a more credible, fact-based basis for debate.

5) Strategic partnerships, and post-investment insights

In business, partnerships are either crucial or fatal. Although not all strategic partners offer financial investment, they may help the company reach out to new audiences. Founders need to be cautious about the terms of affiliation and perform due diligence to justify this relationship to the other parties involved if they are to reap the full benefits of such an alliance.

6) Shareholding patterns and share-cap table

The founders should be aware that after the initial investment, the distribution of shares may vary. They have to study the shareholder agreement and other legal documents carefully to make sure everything is in order. Since the founders' interests are aligned with those of the company, they are in the best position to ensure that all legal documentation accurately reflects the best possible terms for the enterprise.

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7) Fundraising is not easy, be in it for the long haul

Fundraising provides business capital. Investors donate money after due diligence—the process of vetting—in 99 percent of cases. However, this also requires the founders to perform their own due diligence on their partners. An entity is not trustworthy just because they invest in a business.

Finally, entrepreneurs must understand that a deal may fall through even after funding, due diligence, and thorough documentation. Fundraising involves this, which can be disappointing. One must not be discouraged and instead appreciate the legal understanding and learning received from a failed deal, which will undoubtedly bring value to the organisation when it succeeds.