Is your company looking to fundraise? In her last guest blog, VC expert Taryn Strong demystified VC jargon. This time, she sets out the need-to-knows for GCs advising their businesses on fundraising.
1. Prepare for short-term disruption
The process of navigating a funding round is time-intensive and disruptive, and bound to have a real impact on your day-to-day workload. But VC deals are often shorter than fully-blown corporate mergers, acquisitions, joint ventures and so on. It’s common for founders to be out actively looking for money for a while, to the point that it’s part of their day-to-day job. For the GC, the portion of the process when you’re actively dealing with heavy legal documentation is relatively short.
2. Seek the best advice
As the GC, it’s important that you feel comfortable that the founders are getting good advice - whether that’s on corporate finance, strategy, or consulting with external experts, and so on. You must be clear in your mind that they know what they’re signing up to - so, for the company’s sake, they have to take the time to go out and ask the right people for their insight.
3. Finding the right VC
Lots of venture capital outfits have events where you can network and meet other founders, and get a sense of whether you want to be part of the VC’s family. Those things can get lost by the wayside in the chaos of scaling, but they can be really helpful. That’s something that GCs can get involved with, in terms of sense-checking those relationships, keeping it on the straight and narrow, and stress-testing where the founder’s heads are at. That’s a good use of the GC’s time and skills.
4. Desperate is not a good look
The worst position to find yourself in is one where you’re desperate for money. Investors will know straight away that you need them more than they need you, and they will press that advantage and take a harder line because of it. They have a mandate from their investors to do so, after all. Making sure that you avoid reaching that stage is really important.
5. Avoid bear traps in the term sheet
If a deal looks and smells too good to be true, it probably is. If someone’s putting tonnes of cash on the table, you might find founders convincing themselves that it’s the best deal to be done, and being less mindful of the terms of that investment. It’s important to make everyone focus on the kind of investment you want to invite: are you looking for a partner who wants a long-term relationship? If someone’s willing to invest heavily then you need to explore what’s driving them to take that risk. It’s worth weighing it up the same way as when buying property - the highest offer isn’t always worth taking.
Also make sure the numbers involved correspond with what you actually need. Some companies want to just take what they’re offered, and haven’t done the hard work of reverse-engineering what the money will be for. If you don’t know what the money will be used for, you’re not ready to raise it. As a GC you can help to stress-test the founders’ business plan, and make sure their investment asks are credible.
6. Stay in control
Commonly investors are looking to achieve a board seat and observer status; not many VC companies are interested in any significant operational control. Veto rights might need to go through the board, but that’s probably the limit of the operational influence you can allow. Founders should have almost total control. One caveat may be that there are more hands-on VC companies, and some founders might be seeking that expertise out, so make sure your expectations are aligned - generally, that’s more for incubators/accelerators, who provide significant support. As a rule, you and your founders should query anyone who wants involvement in the day-to-day running of the business.
7. Align founders’ and investors’ expectations
This really depends on the investor. VCs, unlike private equity investors, often have industry specialisms, and can be really different. Some investors will just provide the money and take a back seat while others will tend to seek more involvement to mitigate their risk.
The key thing is to make sure that investors and founders are aligned on the business plan and growth forecasts for the next five years. There’s a big difference between an investor who wants you to scale quickly and dramatically, and one who just wants the business to be big enough to sell, and that’s it. Misalignment on those five-year plans can cause huge problems. Finding a specialist VC that can help you achieve that goal - whether that’s through advice on hiring, engineering, markets and jurisdictions - can help to avoid those problems.
Taryn Strong is Head of Legal at Great Point Media and formerly of Freshfields, Olswang and Channel 4. Check out her VC cheat sheet to understand VC jargon better.