Six Steps to Prepare for Venture Financing

How to avoid potential problems with venture capital funding

4Regulatory Matters. When preparing for your equity financing, it’s important to ensure that your regulatory filings have been made. This includes any filings required for securities exemptions, tax related filings and any other material filings required in connection with your business. For example, if your company has a security interest in inventory somewhere be sure that you have filed the necessary UCC-1 Financing Statement perfecting that interest. If a company stockholder wants to make an 83(b) election for restricted stock, has that filing been made? Making, and having evidence of, this and other filings is a great way to inspire confidence during the diligence process.

5Company Agreements. If you have entered into any material agreements such as share purchase agreements or share transfer agreements be sure to have copies of each of these agreements ready for review in the diligence process. These agreements can also include IP licenses, office leases, any agreements with suppliers, vendors and customers or any other agreements that may have a material impact on the company’s ability to conduct business.

6. Familiarize Yourself with VC Terms. Founders range from very sophisticated to novices and everything in between. No matter where you are on the spectrum it is a good practice to familiarize yourself with equity financing terms. There are places on the web where you can gain access to many model term sheets and model agreements but the ideal situation is to sit down with an attorney as you prepare for your equity financing. You should have her explain to you such terms as “redemption rights,” “pre-emptive rights,” “pay to play,” “liquidation preferences,” etc. You will undoubtedly see these terms during your financing round and you don’t want your first time hearing them to be when the VC asks you if you are ok with not having any pre-emptive rights; or with the VC having a liquidation preference of ten times the original purchase price.

Conclusion

While many of these issues may seem like ancillary matters that are not germane to your day-to-day business, they make the difference between a deal or no deal. A small investment in time or legal fees will be enough to put these protocols in place and go a long way in instilling confidence in your investors. We have helped many startups and growing companies prepare for their equity financing round and would be pleased to help you prepare.

For more information on the topics covered in this memo or to learn more about our services, please contact one of our attorneys at contact@rbernardllp.com or visit our website to learn more at www.rbernardllp.com.

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