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Should you use a venture capitalist to fund your business?

These three tips can help you structure a beneficial relationship with a VC.

Venture capitalists and venture capital firms (VC) can provide funds for a growing business. These investors are generally looking to invest large sums of money into a business that has positioned itself to provide big returns. In exchange for providing these funds, the VC generally receives an ownership stake in the business.

This industry works by balancing four main participants. The VC essentially manages three different parties: first is the business owner looking for funding, next the investors looking for a high return and finally the investment bankers that ultimately sell companies for a large gain.

Considering VC funding: Where do I begin?

Generally, business owners meet up with potential investors through networking. A common connection can recommend a meeting. This will establish that you and the VC have a common, trusted connection and that you have the drive needed to push your business forward.

Pursuing investors: How can I better ensure success?

These three tips can help:

  • Have a clear need. Explain what the capital invested by the VC will go towards. Does the business need to expand domestically or internationally? Does the business need funds to increase output of the product? Have a tangible purpose for the funds to explain to potential investors.
  • Know applicable laws. Regulations vary depending on the product. Have a basic understanding of these regulations and how they impact your product.
  • Meet your weakness. Every business has a weakness. Own it and present a resolution.

If accepted, a VC generally provides the business a term sheet. This is a document designed to cover the applicable business terms. If drafted wisely, it will negate the risk for surprises during the investment relationship. Once both parties agree to a proposed term sheet, actual financial documents are provided and the due diligence process escalates. Due diligence will include a thorough review of the business. Be prepared to provide various documentation including financial documents, employment agreements and intellectual property materials.

The VC generally offers the funding in one of two ways: outright or in waves. Ultimately, a relationship between a VC and a business generally lasts four to six years before the VC shifts its role through a merger or acquisition with another business.

Another good question: Why do I need an attorney to help structure this deal?

The financial relationship that exists between business owners and VCs is a dynamic one. When structured wisely, it can translate to a positive experience for both parties. An attorney experienced in this niche area of legal practice can help draft and revise the documents that guide the financial arrangement, better ensuring a fair agreement that meets your business’ interests.