If your early stage company is serious about attracting angel or seed financing, you must have a command of most aspects of your business. Following are some of the business and legal considerations that potential investors will likely drill you on:
Business
- Show us your market research. Are there competitors? If not, does your market even exist?
- Do you understand the importance of a sales team and a go-to-market strategy?
- Do you have the right team? Does the founding team have both technical and business expertise?
- Do you have a clear cash flow, burn rate, and runway analysis?
- How strong is your grasp of key metrics?
- Are you coachable?
- Are you unrealistic about the company’s valuation? (No customers, yet showing a $18 million valuation. Really?)
- How complicated is the cap table? Is there a founder-level individual(s) that are no longer with the company but still have a chunk of the company?
- A Series A investor will typically want to see that the founders are still majority holders of the company (or close). If they’ve diluted too much beforehand, they will struggle raising money from certain investors down the road.
- Is the founders’ compensation too high?
- Is an investment banker involved in raising the round? Venture investors don’t like having their capital spent on investment bankers. Good founders ought to be able to raise capital on their own.
- Is there significant outstanding debt, other than convertible notes?
- Are there any current or impending lawsuits or disputes, particularly involving intellectual property (IP) or employees?
- Do you own your IP? Is any key IP licensed from elsewhere?
Legal
- Did a qualified attorney incorporate your business? If LegalZoom or your brother-in-law’s neighbor that practices family law attorney handled it, it’s likely full of mistakes that can cost the business dearly. (Note: one of my colleagues at a BigLaw firm told me: “I love LegalZoom. Fixing their mistakes has paid for orthodontics for my three kids”).
- How organized are your documents? Messy document organization and missing documents are a big problem.
- Are you missing or have improper employee, consultant and contractor documentation (e.g., employee assignment docs)?
- Are members of the development team (or other key employees/founders) still working at the “old company,” or are otherwise part-time? Did they develop their IP while previously working elsewhere?
- Was there a Friends and Family round of fundraising consisting of a large number of investors with small investments and inadequate documentation? This may not be a “Red Flag,” but it’s definitely a “Yellow Flag.”
- Are there any complex legal structures such as offshore entities in “tax haven” jurisdictions or holding companies?
This is a short and beginning list of items that will cause an attorney and potential investors to dig deeper and start asking questions. At best, it will slow down your financing. At worst……..
