Once you have researched the risks and returns of pairing with a venture capital firm and have decided to go forward, here is what to expect:
• The VC members review your business plan. If your business meets the VC’s criteria for type of business, stage of development, etc., the members will meet with you to take the next step, which is…
• Perform due diligence. This is perhaps the most important step in the process, as it can make or break your opportunity for obtaining funding. Great detail is paid to the figures behind your plan – your business’s financial statements, details about your management team, and corporate governance documents to name a few.
• Make an Investment: Once the members of the VC have decided to go forward with funding your business, a Term Sheet is drafted. This sheet outlines the terms and conditions under which money will be granted. If you agree to these terms and conditions, the money is invested and you, in exchange, provide agreed upon equity in your company, mitigating the risks for the VC. The money is paid in installments based upon milestones crafted within the agreement.
• Exiting the Business: VC’s sever their ties with companies at some point – usually within four to six years. This usually occurs through mergers, acquisitions, or IPO’s made possible by the business ties of the VC firm. This is also the time when the initial loan is repaid, with interest, and the money returned to the high-net-worth investors. Repayment through shares of stock is sometimes acceptable as well.
Although the stakes are sometimes considered higher, entering into business with a VC firm can prove to be a valuable strategy for some businesses. For others, there may be more beneficial financing options. It’s vital you do your research and employ the advice of professionals who specialize in the practice of your business’s legal concern.