Once you have successfully registered your new venture and executed your partnership agreements, the next phase is getting your new venture up and running. For some, this might not be an issue as you probably have sufficient savings and contributions from family and friends to commence this new venture. For others, the fundraising process begins!
Fundraising is not a task for the faint hearted, as it requires a high dose of patience, perseverance, tolerance, and politeness. However, while the fundraising process might require a heightened tolerance for frustration, it is imperative that you think beyond the fundraising process.
For example, you should not accept a potential investor’s offer simply because that investor has agreed to give you all the funds you need to scale your new venture without thinking through the possible impact that potential investor may have on your new venture or ownership structure. This segment details some important points that you should consider during your fundraising process.
1. Don’t let the cat out of the bag prematurely
During the fundraising process potential investors will ask you to share information about your new venture so that they can make an informed decision on whether or not they can provide you with the funds you require. Indeed, you have to furnish them with some of the information they seek.
Nonetheless, it is important you strike the right balance between your fundraising needs and safeguarding your new venture’s confidential information. You have worked hard to develop your new venture and create a niche for yourself, as such, while you may be in desperate need to fundraise, you should also think beyond the fundraising phase by safeguarding your new confidential information.
Moreover, of what use will the funds raised be if at the end of the fundraising process your new venture’s secrets has been disclosed to potential competitors who are now offering the same exact product you wanted to offer? You owe it to yourself and your new venture to protect your new ventures’ confidential information such as the “know-hows” of your new venture, the trade secrets, and all other information that makes your new venture unique. Thus, before you commence deep discussions about your new venture with a prospective investor, it is imperative that you sign a non-disclosure agreement (even if that prospective investor is a friend!).
Your non-disclosure agreement should: (i) be executed by all parties that you want to be bound by the agreement, (ii) identify the right legal entities and/or individuals that are intended to be bound while also indicating that representatives and affiliates will be bound, (iii) provide remedy in the event of breach, (iv) include a definition of what constitutes confidential information, (v) address the term of the non-disclosure agreement and what happens at the end of the term, i.e. whether the investor has to return the confidential information to you or destroy it.
Indeed, executing a robust non-disclosure agreement with an investor does not prevent such investor from breaching the agreement. As such, protect your new venture by taking the extra step of researching each potential investor to ensure that such investor is a respected and professional player in the market.
2. Think carefully, pick selectively
You must carefully select an investor. Yes, the order of the previous sentence is intentional! In a world where financing is not infinite, entrepreneurs often feel very lucky to find an investor who is willing to invest in their business. While the feeling of immerse gratitude is not misplaced, it is imperative that entrepreneurs also carefully select their investor. Do your due diligence on your potential investors! Remember, an investor’s investment is never “free”! It often comes with numerous strings attached.
Oftentimes, these strings are good strings in that they bring value to the new venture. For example, the investor may require you to adopt environmental, social, and governance policies, or anti-money laundering policies. Such requirements are valuable additions as such changes could translate to higher returns for your new venture.
As such, before signing those dotted lines, entrepreneurs should consider the investor’s track record and reputation in the industry, the investor’s proposed economic rights and governance rights and whether such economic rights are proportional to the investor’s proposed investment, the factors the investor considered in arriving at its valuation.
Think of your investors as long-time business partners—you may be married to them for a long time. So, think carefully and pick selectively!
3. Don’t jump to the finish line
So you are extremely excited that you have selected the right potential investor and strongly believe that the potential investor will invest in your new venture within a few months. Indeed, you trust your intuition on this because your intuition always leads you to the right path. As such, you believe that the next logical step is to email all your new venture agreements (shareholders’ agreements, share purchase agreements etc.) to the potential investor while they conduct their final review process so as to streamline the process. Please Don’t!
Wait until you hear from your potential investor that they have decided to strike out “potential” from the words “potential investors.” There is no point jumping to the finish line and investing resources by drafting agreements that may not be eventually utilized. Moreover, your investors might have a preference for providing the definitive agreements.
To summarize, the fundraising process is not a task for the faint-hearted. While you may have an urgent need for working capital, you should also ensure that you safeguard your new venture throughout the process. The success of your new venture also rests on your ability to protect your new venture’s confidential information.
In the next segment, we will discuss the non-disclosure agreement in detail. If you would like insights on a particular topic, write to us! We are listening.