As a startup founder, raising capital can be a daunting process. You may have faith in your startup’s ability to succeed, but to help provide the funds to grow the business, you need to attract investors. These investors must not only believe in your ability to reach success, but they must be willing to provide you with the capital to back your startup. Although each investor is different, there are a few common factors that startup investors will look to before they invest. This article will outline four things startup investors look for before investing.
1. Understanding the Market
Investors are often wary of what they do not understand. An investor will want to have information on:
- the market;
- how they will be able to add value to your startup;
- the size of the market; and
- the potential opportunity.
As a startup founder, you will need to explain this succinctly and accurately to an investor. Further to this, in circumstances where you are entering an existing market, your investor will want to understand:
- the startup’s competition; and
- how your startup is different from your competitors.
It is essential to be able to clearly explain your target market and the market in which you will be operating.
2. Background and Experience
A startup is only as strong as the people behind it. An investor will want to have an understanding of the key people currently involved in your startup, including their professional backgrounds.
An investor will also usually want information about the founding team and their previous experience. Additionally, most investors will want to know that the team are committed to the business and will look to see that you have implemented vesting on key peoples’ shares.
3. Successes and Actual or Projected Financials
Startup investors are generally willing to take risks in exchange for the possibility of significant reward. Given the uncertain nature of startups, investors understand that commercial traction may not have happened yet. Of course, if your startup does have commercial traction, then this is a great thing to demonstrate.
Regardless of whether real traction has occurred, investors want to know that you have taken steps to engage with the market and that there is a desire for your product offering. When discussing your projected financials with your investors, they will want to:
- know that your assumptions are well-founded and based on realistic expectations;
- see your actual financials; and
- have a clear understanding and access to your figures.
4. Legal Documents
Intellectual Property Assignment Agreement
Your investor will want to see strong legal foundations. These include ensuring that the company owns or has rights to use all intellectual property (IP). This can be demonstrated through a founder’s intellectual property assignment agreement.
If your company has a dual-company structure, whereby you have a holding company and an operating company, investors will also want to see an IP licensing and assignment agreement between the two companies. This involves the:
- holding company licensing its intellectual property to the operating company to use; and
- operating company automatically assigning any intellectual property that it creates back to the holding company.
Other Legal Documents
In addition to the IP assignment agreement, other critical legal documents include:
- contracts which demonstrate that the company formally engages all employees or contractors and set out the terms of their engagement; and
- client agreements or terms and conditions between the company and its clients or customers that set out the company’s rights and obligations and its compliance with Australian consumer law.
Also, the investor will need to sign legal documents when they provide you with capital. Typically, they will want to:
- see these documents before they invest; and
- know that you have prepared these documents well.
Well-drafted documents give investors the confidence that you are conducting your startup properly and are taking the time to ensure that things are done well.
Your investor will likely want to see a term sheet, shareholders agreement and a subscription agreement. The investor will want to know the rights that they will be receiving. For example:
- can they appoint a board member to the board of directors?;
- does that director have veto rights? If so, over which decisions?;
- what rights does the shareholder have?; and
- do they have a first right of refusal to subscribe for a new issue or to buy shares being sold?
Your investor may also wish to see a clause in your shareholders agreement that provides for the issuance of options to employees under an employee share option plan.
Every startup investor is different. However, there are many common things that investors look for before they invest. Ultimately, an investor wants to know that:
- your startup is worth the financial investment and risk; and
- there is considerable potential for a significant return on investment.
Given that startups are often in their early-stages when they approach investors, most investors are basing their investment on perceived potential. They will look at your target market, your startup’s team and experience as factors demonstrating potential. Additionally, an investor will want an understanding of the legal documents your startup has in place. If you have any questions, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.
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