
Raising capital from a venture capital (VC) firm is an important moment for any startup founder, but it’s a process fraught with complexities, demanding adherence to the industry norms. As a startup lawyer, I’ve guided countless founders through this journey.
This article sets out five steps to successfully navigate a VC funding round, from preparation to closing, ensuring you’re equipped to secure investment while protecting your startup’s interests.
Step one: Preparation and due diligence
Before approaching VCs, ensure your startup is ready for scrutiny. VCs will usually conduct thorough due diligence, so your legal and financial stuff must be in order.
Formally incorporate your company based on where you are domiciled, ideally as a company, which is the standard for VC-backed startups due to its flexibility and investor familiarity.
Ensure all founders, employees, and external contractors have signed agreements covering equity, intellectual property (IP) assignment, and confidentiality agreements. Confirm that all intellectual property assets (e.g. source code, patents, trademarks, or proprietary technologies) are properly documented and owned by the company.
Organise your financial records, including balance sheets, cap tables, and revenue projections. A clean cap table, free of disputes or unclear equity allocations, signals that you know what you’re doing.
Engage a lawyer to take a look at your corporate documents, as any gaps (e.g., missing board approvals or unsigned contracts) can derail negotiations.
Finally, prepare a compelling pitch deck that highlights your team, market opportunity, traction, and financials.
Step two: Identifying and approaching VCs
Before reaching out to any investor, take time to identify a potential VC firm that may have a proven interest in your industry and stage of growth. Use platforms like e27 to look up recent investments and understand each VC’s focus areas.
Some VCs specialise in early-stage or seed deals, while others only come in at Series A or later. Pay attention to sector preferences, some funds are deep into fintech, climate tech, or enterprise SaaS, while others stay clear of capital intensive or hardware driven businesses.
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As a founder, it may also be important to understand how VC funds actually work behind the scenes. Don’t be afraid to ask if the VC is still deploying capital, especially if it’s later in their fund cycle. Most funds operate on a 10-year life cycle, and VCs typically make new investments during the first 3 to 5 years. If you’re speaking to a fund that’s nearing the end of its deployment period, they may be more focused on follow-on investments or supporting portfolio companies, rather than backing new ones.
Leverage your network to seek warm introductions. Cold emails might work, but a personal referral from a mutual connection like a founder they’ve backed may increase your chances of getting a meeting.
From a legal perspective, resist making overly optimistic claims about revenue or market share that could be construed as misleading. If you get asked for projections, label them clearly as estimates. At this stage, you may wish to sign a non-disclosure agreement (NDA), but many VCs usually avoid NDAs to maintain flexibility so you may want to discuss sensitive information cautiously.
Step three: Term sheet negotiations
If a VC is interested, they’ll issue a term sheet outlining the deal’s key terms. A term sheet should contain valuation, investment amount, equity stake, and governance rights.
This is where legal expertise is critical. A term sheet isn’t usually legally binding but sets the framework for the final agreements. Focus on valuation (pre-money and post-money), as it determines your dilution. A startup lawyer can help model scenarios (e.g., how dilution affects your stake in future rounds) and push back on terms that could harm long term flexibility.
Be wary of liquidation preferences, which dictate how proceeds are distributed in an exit. A 1x non-participating preference is standard, but more aggressive terms, like 2x participating preferences, should be resisted as it is not the usual norm.
VCs often request board seats so you may need to negotiate board composition carefully while maintaining founder control. Anti-dilution provisions, reserved matters, and tag-along and drag-along rights also require scrutiny.
Step four: Due diligence and definitive agreements
Once the term sheet is signed, the VC’s due diligence intensifies. They’ll request detailed records of contracts, financials, IP filings, and compliance documents that you may make available in a virtual data room.
Any discrepancies (e.g., unfiled taxes or unresolved disputes) can lead to re-negotiation or deal termination.
Also Read: How do you raise VC funding as a student entrepreneur? Find out the answers here
Concurrently, your lawyer can help to review the definitive agreements, including the shares subscription agreement and the shareholders agreement in a priced round. These documents formalise the term sheet’s terms.
Pay attention to representations and warranties, where as a founder you would be needed to attest to the company’s legal and financial health. Negotiating the warranties is crucial to limit your exposure as missteps here may lead to post-closing liabilities.
Step five: Closing and post-funding
After due diligence clears and agreements are signed, you would need to fulfil the conditions precedent set out inside the agreement.
The conditions precedent include delivering the signed copies of the board and shareholders resolutions of the company for the allotment of the new shares to the VC and obtaining the existing shareholders preemptive right waiver for the new shareholders
Once these are satisfied, VC disburses the funds, and the company secretary may give effect to the shares issuance.
Post-closing, maintain open communication with your new VC shareholder as they’ll expect regular updates on financials, milestones, and strategic decisions, often based on the agreed investor reporting obligations.
Final thoughts
A VC funding round is a marathon, not a sprint. Get an experienced startup lawyer early to avoid pitfalls. By preparing diligently you may increase your chances of securing capital while positioning your startup for long-term success.
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