Raising capital can consume the time and emotional energy of founders and their key team members for at least six months. Founders can feel they are sacrificing the development of their startup to raise capital so as soon as an investor says “yes” their attention turns away.
However, a lack of attention and lost momentum is the best way to lose investors and their capital.
Regardless of previous verbal commitments to a funding round or how great your venture might be, capital raising is not done until the money is in the bank.
The documentation you need to complete
To complete the capital raise, founders must provide due diligence materials and negotiate with the lead investor on the content of a number of essential documents.
At a minimum, these essential documents include:
- Term sheet
- Shareholder’s agreement
- Subscription agreement
- Business plan
- Founder’s employment agreements
While there are lots of free or low-cost templates available, they need to be customised for the particular venture. Developing a set of documents that are correct, consistent and comprehensible will take a minimum of three weeks, even when all parties are well prepared.
Investors will not sign binding agreements or hand over funds until they can see all the agreements. Experienced investors know how important it is to get the detail right before completing the agreement.
Why founders fail to close a capital raise
Too often there are long delays caused by the founder’s inability to:
- Provide accurate accounts or a meaningful capital table
- Clarify obligations to past suppliers or staff
- Agree the terms of the investment round
- Deal with legacy shareholders
- Complete regulatory requirements
Founders who fail to provide this information within a reasonable time run the risk of losing momentum and the investor’s interest and consequently their capital. Delays can also highlight a weakness in the founding team’s capabilities.
Once an investor has agreed to invest, founders must confirm the precise information the investor requires and the expected timeline to banking the funds.
Founders who get the documentation completed efficiently and effectively will maintain the momentum of the investment round. They will demonstrate they are ready for the challenge of managing the greater complexity of a business that comes from taking external funding and boost their investor’s confidence.
Angus Parker is Venture Partner at Trimantium Capital and a mentor for the RMIT Business planning competition. You can follow him on Twitter here.