3 Important Tips for Advising Startups on Raising Capital
Too often, startup founders think they know everything and the only thing they need is money.
That’s because they believe they have the next big thing, and that it will put them in the same company as startup legends. But for every startup billionaire, there are a billion startup failures.
This blog is ultimately for the exceptions, the founders who know early that they need legal help. It’s also a guide for lawyers to prepare for those who actually have a future.
In the beginning, there was a founder with an idea. Like Reggie Brown, who said he came up with the idea for Snapchat, but later got ousted.
Snapchat paid him a $157.5 million settlement, but it was not much compared to the company’s $25 billion valuation when it went public. It could have gone better if the founders had their paperwork in order before it got that far.
“A founder should take the time necessary to confirm that the company’s financials, accounting records, employee records, customer contracts and capitalization table are all in order before initiating the fundraising process,” attorney John Rafferty wrote for BizJournal.
Rafferty is a partner with Morrison & Foerster, which counsels hundreds of startups yearly. He said the top things founders should do, when seeking capital, include:
- Selecting the right amount of equity financing
- Preparing for due diligence from the VCs
- Building a good team of advisers
“In addition,” he said, “perhaps the most important item to ensure that the startup’s intellectual property rights in company property are secure through strong intellectual property agreements with employees and consultants.”
Valution, term sheets, liquidation preferences, etc., are all legal minefields for the unwary founder on the way to the investor’s table. An experienced startup lawyer will know about the hidden dangers.
“Moreover, an experienced startup lawyer will be aware of the latest legal developments and the pros and cons of financing alternatives to a VC investment (e.g., initial coin offerings and cryptocurrencies),” Rafferty said.