Top Tips for Business Fundraising
By Jasmine Su, Last updated: 2021-07-12 (originally published on 2020-11-27)
Every successful venture requires financial backing but securing business fundraising is a complex and challenging process for any entrepreneur. Deciding which avenue to pursue for investment is a good place to start. Securing the backing of an investor means you will need to ensure all the correct and relevant legal documentation is in place in order to protect all parties involved.
So, what are the key concepts and what should you be looking out for? Here are all the steps you should take to complete the business fundraising process.
The 6 Steps of Receiving Funds
- Create a Term Sheet to summarise the discussion around key terms of the fundraising
- Get approval from your board of directors to proceed with the fundraising.
- Create a formal agreement to record the detailed terms of the fundraising, including rights attached to the class of shares to be issued.
- Get your shareholders to approve the fundraising .
- Create a Shareholders’ Agreement to define the post-fundraising rights and obligations of the shareholders.
- Create a Share Certificate for each investor at the end of the process.
Essentially, there are three main solutions to fundraising. These are:
- Issuing your investors with Preference Shares
- Issuing your investors with Ordinary Shares
- Issuing your investors with Convertible Notes
Depending on which solution you follow, the Zegal app takes you through the process step by step enabling you to create the necessary documents to complete the process.
Three Business Fundraising Solutions
Issuing Preference Shares
Firstly, this class of shares have specific preferential rights attached to them. Typically the preference will be a dividend paid in priority to other shareholders. A Preference Shares Investment Term Sheet is a record of discussions between the founders of a business and an investor for a potential investment by preference shares. Secondly, this document also sets out the parties’ preliminary thoughts on certain provisions to be included in a Shareholders’ Agreement which will be executed at completion of the investment and will protect the interests of the company or shareholder.
It is important to note that investment by preference shares is highly sophisticated. If you are not familiar with how preference shares work or how this investment agreement operates, you should seek legal advice.
Issuing Ordinary Shares
Importantly, Ordinary Shares represent normal equity ownership in a company but do not carry preferential rights. Generally, Ordinary Shares entitle the owner to vote at shareholder meetings and receive dividends. A Seed Investment Agreement (Ordinary Shares) is a contract by which funds are raised by issuing new ordinary shares to investors. Notably, raising funds by a Seed Investment Agreement is simple and direct. The new investors have the same class of shares as the founders and therefore have equal rights.
Issuing Convertible Notes
A Convertible Note is a form of short-term debt that converts into equity. In essence, the investor would be loaning money to your startup. And, instead of a return in the form of interest, they would receive equity in the company. A Convertible Note Certificate is a certificate that evidences the investor’s title to the convertible note. Typically, it is issued after due payment of investment amount by an investor.
Getting the attention of investors
How do I get the attention of an investor to fund my startup?
Essentially, when seeking the backing of an investor it is vital to put together a compelling executive summary to engage their interest. An executive summary should contain the following elements:
- A clear and simple hook
- A problem that you are addressing
- A tangible solution that strikes the imagination
- A well thought through business and economic model
- The size of the business opportunity
- Distinctive and defensible differentiation
- Intellectual property and protection
- Your team and your passion
- Funding required
In summary, it is crucial to conduct thorough research on your potential investors. Build an executive summary that will appeal to them. And customise your pitch accordingly. In particular, angel investors place great importance on the team and founders when deciding whether to invest in a startup.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.