Venture capital funds don’t expect startups to be well-oiled machines. In fact, they go into potential deals knowing there will be problems. These issues range from disgruntled founders to disputes over who owns a company’s intellectual property. Acquirers are prepared for these issues and M&A and venture capital professionals will not be surprised to uncover some of these issues during the diligence process. However, when preparing for equity financing it is important that your company does not have the kinds of problems that may be so fatal that it kills your deal.
Establishing and maintaining good corporate hygiene will pay dividends as you negotiate your venture financing. By preparing in advance, you can minimize some of the pain and effort in the diligence process and focus instead on negotiating the best deal for your company.
Here are some tips on how you can properly prepare for your equity financing.
1. Create and maintain a reliable capitalization table. Your company’s capitalization table is the first item any potential investor or acquirer will ask to see when considering an investment, acquisition, merger or strategic transaction. Your capitalization table should include who you have sold stock to, for what price and in what quantities, whether those shares have certain voting rights and other related information. When you pitch to a VC firm and they are interested in your idea you don’t want to make them wait an additional week as you scramble to contact your investors to see who owns what and to create your stock table. Your ability to quickly furnish a clean and accurate cap table will impress investors and give the impression that you are organized and in command of your business. As your company grows, your capitalization table will be your first point of reference for handling stock options and tracking compliance with regulatory requirements. Outside counsel or an accountant should prepare and maintain your cap table.
2. Protect your intellectual property. This issue can quickly kill a deal. Simply, if you are reading this and your intellectual property is not registered or if there are any disputes, stop right now and register your IP or solve your disputes. Your IP is potentially your most valuable asset and your investors know that. Before they make a sizeable investment, they want to ensure that your company has a clean record with respect to owning and protecting its IP. The first task you should undertake after forming your company is to get each and every individual or entity that has worked on the company to sign bulletproof (and enforceable) confidential information and IP assignment agreement. There are many model agreements available on the web but as with any model it is just a start; make sure that your model agreement is tailored to your jurisdiction and is enforceable where you do business. Failing to accomplish these steps can torpedo your deal before it ever gets off the ground.
3. Corporate Governance. Corporate governance is an essential part of good corporate hygiene. When preparing for an equity financing one thing you want to get together from a corporate governance standpoint is to ensure that the company’s minute book is in order and up to date. Along with this you should gather the company’s bylaws, articles of incorporation, stockholder consents and minutes. Make sure that you have licenses to do business in all jurisdictions where the company does business. Confirm that board and stockholder actions have been properly documented and signed. For example, if there is a share transfer or if there was an instance where the company took on more debt, did these events follow the proper corporate protocols that you have put in place?