Many companies, including those in the cleantech industry, seek to raise venture capital to support or stimulate growth. Other companies raise venture funding to establish credibility or to access resource networks that their venture capital partners have developed through years of experience. A seasoned venture partner often becomes a valuable confidant, advisor, and sounding board for executives or founders. If you are planning to seek venture capital financing for these or other strategic reasons, there are certain measures you can take to position your cleantech company for venture capital financing.
- Structure of your business entity. Venture capital funds prefer the “C corporation” as a form of entity to invest in. These investors view limited liability companies (LLCs) as being more difficult to use equity as currency for acquiring businesses in the future and cumbersome to use for growing a business that desires to attract employees with equity. Additionally, such entities do not, and often cannot, conduct initial public offerings.
- Allocation and pricing of equity interests. Since there is no real “market” for the equity interests of your cleantech company, decisions on what percentages of such interests to allocate to founders, employees, and other service providers, and at what price, are critical and highly fact-specific. Before making an investment, venture partners want to make sure that those individuals running the business have the largest equity stake in the company. Although it is common for founders to be issued equity for a nominal amount of money, seed investors, employees, and other service providers should only own an equity percentage—and receive such percentage at a price—that is reasonable and proportionate when compared to their contributions to the business and how long they will continue to serve the enterprise. (Vesting may be appropriate, particularly with stock options.)
- Quality of management. Many venture capital funds consider management team quality to be the most important factor when conducting due diligence for a potential investment. Management will be evaluated on its maturity, expertise, creativity, commitment, leadership skills, and communication skills. The ability of top management to attract, develop, and retain new talent is imperative. Venture partners do not want to run your cleantech business. They seek management that is competent and capable to do so with leadership that will create a substantial return on their investment.
- Lock up your intellectual property. Seek strategic and adequate protection of your company’s intellectual property (i.e., patents, copyrights, and trademarks) through registration with the U.S. Patent and Trademark Office. In addition, protect your business’s know-how, trade secrets, and other intellectual property rights through contracts, including, without limitation, (i) technology assignment agreements with founders; (i) invention assignment or proprietary assignment agreements with employees; (iii) consulting agreements for other service providers; (iv) licenses from third parties; and (v) non-solicitation and non-compete agreements among founders and by employees (scope of enforceability may vary by state).
- Hiring and wage considerations. All persons who work full-time and, in some cases, those who work part-time for your cleantech company will be deemed employees for purposes of federal and state wage laws, even if you do not label them “employees”. If there is a misclassification with respect to whether a person is serving your business as an employee or an independent contractor, there may be substantial potential liability with respect to, without limitation, minimum wage/exempt minimum wage requirements and tax withholding requirements.
By undertaking strategic planning and consulting with experienced professionals such as accountants and attorneys at the outset of your cleantech business, potential venture capital partners will be more attracted to your company for investment purposes. The above includes some but not all of the material issues to be considered.