If you’ve determined that your new venture is going to require outside investment, there are a number of things you can do to make your company more attractive to investors:
1. Keep it simple! There are any number of ways that a young company can complicate its capital structure. Given two similar opportunities, investors will head for the one that is easiest to understand and requires the least modification before closing. For example, a simple capital structure of common shares issued to a small number of founders and strategic angel investors and an option plan for key employees, contractors and advisors is much more attractive than multiple classes of shares and/or convertible notes issued to numerous friends, family and non-strategic investors and individual options granted to non-core advisors with no option plan. Fewer shareholders with fewer rights will dramatically speed up your time to closing a new investment. As will an excel spreadsheet (a “cap table”) that lists all of the shares, options, and other securities (if any).
2. Organize your corporate records. It may seem unimportant at the time of incorporation and the early days of your company, but you can save yourself time and money by keeping an organized record (electronic or otherwise) of all of your legal documents: articles of incorporation, by-laws, minutes of board and shareholder meetings, subscription agreements, share certificates, contracts, NDAs, employment/contractor agreements, etc. When an experienced investor begins due diligence, they will want to review all of these documents. If your house is in order, you can focus on negotiating the investment, instead of cleaning up corporate records. Anticipate due diligence and plan accordingly!
3. Protect your intellectual property. Before you incorporate your company and afterwards, have every founder, developer and advisor that you work with read and sign an intellectual property (IP) and confidentiality agreement that is well-drafted and assigns all inventions and other IP developed for the company to the company. Also, if you are bringing IP into the company that was developed before the company was incorporated or otherwise outside of the company, have the person contributing the IP sign a specific IP assignment to the company that transfers the IP to the company. These two documents are easy to obtain from legal counsel with experience in early stage investing. Keep copies of these handy – investors want to know that the company’s confidential information and IP is protected.
4. Sign up your employees and contractors. Employment laws place numerous obligations on your company with which you must comply. For example, employees in Ontario must be paid at least minimum wage. A simple well-drafted employment offer letter and contractor agreement are must-haves for your company. Investors will ask to see your employee and contractor agreements primarily to ensure that salaries, vacation, benefits and termination entitlements are reasonable.
5. Leverage Government Funding. The federal and provincial governments have many programs geared to supporting our start-up ecosystem. Some are dilutive (i.e., the government takes an equity stake in your company) and some are non-dilutive (i.e., a grant or repayable contribution).
One final note, retain advisors (business, legal, accounting and tax) that routinely work and specialize in working with start-ups and you will save yourself aggravation, time and money. Early stage and venture capital financing and the agreements that are required by investors have now been around and standardized for more than twenty years. Experienced advisors will not be learning “on the job” and will be able to quickly help you navigate the many complex concepts and legalese involved in early stage and venture capital investments!