Monday, March 12, 2012

Raising Money? Don't Get Ripped Off

These five tips can help you keep more of the investors' dollars in the company's coffers—and out of the lawyers' pockets.

Work with a True Venture Lawyer
Naturally, I am a little biased on this one! But in all seriousness, working with an attorney who specializes in start-up financing can go a very long way in reducing legal fees and deal friction.

Understand How the Investment Works
Any experienced entrepreneur will tell you that having a strong grasp on the deal mechanics will help facilitate a faster pitch process, term sheet signing, and closing. Take the time to understand exactly how the deal works. Lean on your lawyer to educate you on the critical investment terms, current market conditions, and closing logistics, so that you can become a well-equipped negotiator.

Find a Lead Investor
 With the wide variety of crowdfunding options available, it is true that you can mass-syndicate financing rounds a lot easier these days. However, having a strong lead investor helps create a natural momentum in the deal. You not only generate more excitement around the investment (the "social proof" that everyone talks about)—you also create a more efficient process. With a lead investor in place, you are more likely to avoid last-minute changes to the financing documents—and can more effectively goad the smaller investors into dropping minor negotiating points and simply going along with the proposed deal terms.

Stay Organized on Your Side—From Day One
 The biggest driver of legal fees in a financing is generally not the back and forth over the deal documents—it is the review and associated clean-up of the company's legal due-diligence materials. Your investors (and their lawyers) will have an extremely limited tolerance for untied loose ends, particularly with respect to your company's capitalization, corporate governance, and intellectual property ownership. There is often an urge to put off the legal housekeeping until funding. Bad idea.  Complete everything associated with formation at the time of formation. Keep your signed contracts in one place. Keep your counsel in the loop.

Over-Communicate with Your Lawyer
I cannot over-emphasize that last sentence. Your lawyer or lawyers need to stay well informed throughout the entire fundraising process. Failing to communicate with your lawyers will slow things down and allow potential problems to snowball. Keep your lawyer in the loop as you are pitching investors and debrief them on your progress. Bring up potential legal issues quickly so that your counsel can resolve them. An experienced venture lawyer has "seen it all"—they can help you identify and overcome potential deal hurdles.

* Originally written by another author

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