VENTURE CAPITAL: 3

PREPARING FOR THE VC

PREPARING FOR THE VC

NEEDs:

Preparation of documents 2. Subsequent negotiation 3. Structuring the deal 4. Required Overall Skills
1.
TO MEET THE NEEDs:

1. 2.

Buy/HIRE experienced Professionals Buy Requisite Skills

AIM:

Final Legal closure 2. To Reach the Goal of getting Venture Funding

1.

Spectacular Achievement is Always preceded by Spectacular Preparation- Robert H. Schuller

PREPARING FOR THE VC:REQUIREMENT

1. Hiring Advisers

2. Doing an Internal Review of ventures business.

3. Doing a growth Audit 4. Determining the Strategic Direction of ventures business 5. Building ventures Board of Directors and Advisory Board 6. Understanding Ownership, Dilution and Rounds of

Financing 7. Determining the Valuation of your Business for VC Funding 8. Forming Business Plan 9. Determining Funding Plan 10. Shaping Elevator Pitch and VC Presentation

HIRING ADVISERS Types of Advisers:

1. A

VC intermediary who possesses corporate finance skills. 2. A firm of Chartered Accountants. 3. A firm of solicitors for legal advice.

VC intermediarys tasks
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

11.
12. 13. 14. 15.

Lead Adviser to the VC fund Explain and advise the management on the whole process Develop , advise and execute strategies Do pre due diligence review Arrive at a valuation & equity percentage to be offered to VC. Review the financial forecasts & statement of funding Preparation and review of the business plan/Executive Summary etc Assist management team in preparing Presentation Make a list of selected VCs, likely to be interested in funding Develop & execute negotiating strategy Arranging meetings & to assist management in presenting to VC. Assisting management in term sheet negotiation. Manage the issues that come out in due diligence process of VC. Assist management in negotiating the final legal agreement. Assist for regulatory/Statutory amendment as required by VC.

BENEFITS FROM VC INTERMEDIARY

Experienced in negotiating business terms including price , non-

competition covenants, deal structure , payment terms, management contracts , security etc. Help to maximize the value of business and to facilitate to get VC money at the best term. Develop a focused business plan including the timing in raising capital. Improve chances of obtaining VC fund leaving management in concentrating in business growth. Help in Good Cop, Bad Cop negotiating process. Help in answering sensitive & critical issues like valuation of your business , VCs shareholding , Share Allocation to ESOP , Founder Compensation, Decision making powers post VC investment etc. Can put together a reliable and cohesive team of advisers to ensure the deal gets done as quickly and efficiently as possible.

Dos & Donts : VC INTERMEDIARY

Dos:

1. 2. 3. 4.

5.
6.

Letter of Engagement with clarity about his work profile Involve at the initial stage with a confidentiality agreement. Project Plan- time table for each deliverable Intermediary is the nodal point & drive the deal till completion Be open & honest as he needs all information to protect interest Structure his payment terms Fixed plus Success Fee to carry the process till the end

Donts:

Ignore advice on the business plan & while negotiating with the VC. 2. Treat him as an outsider, instead, share concerns & aspirations. 3. Keep secrets from him, if problem occurs ,let him know 4. Ventures, if capable, would able to get correct advice and better negotiation tips from him as & when required.
1.

PREPARING FOR VC: CAs Role

1. 2. 3. 4. 5.

6.

Create the Financial forecasts of the business. Determine the funding needs in conjunction with ventures team Develop a business Plan with the inputs from ventures team Do a limited review of businesss systems , policies and process and exhibit weakness needs corrections Conduct a secretarial audit and ensure that records like shareholder minutes, board minutes , statutory registers, employment records of directors and key employees etc are properly maintained Review the tax return, assessment orders, tax demands raised by revenue authorities to identify and quantify the financial risks & impact thereof in financial forecast

PREPARING For VC: Legal Advisers' Role

1. 2. 3. 4. 5.

6.
7.

8.
9.

Term Sheet Investment Agreement Shareholders Agreement Service Contracts for Directors and key employees Other legal Documents like IPR licensing agreement etc Changes, if any, in Memorandum & Articles of Association, reflecting the terms of the investment agreement Board & Shareholder minutes relating to the issue of securities, appointment of directors and the resignation of existing directors Permission and filing on the issue of shares to the VC & the appointment of Directors Manage any other issues which create legal risk and exposure for business

VC FUNDING COST
On average, the cost of raising venture capital works out to be between 5% to 7% & even at 10% of the amount of capital raised, types are 1. VC intermediarys brokerage fee: 5% to 7% of the funded amount, major payment, about 70%,would be back ended, payable as success fee termed as Fixed plus success fee . There is also The Lehman Scale ,based on the size of the transactions. 2. Advisory services of the various consultants hired for the project: Payment to CA and Legal Advisers based on the quality of services delivered and is charged on an hourly basis. Fees are paid on staggered basis on the sequential completion of tasks. 3. Opportunity costs of Mgt time & dilution of ventures equity: Due diligence & on going monitoring cost incurred by VC Opportunity cost , not ventured, out of the use of Management time The most expensive cost of future dilution of ventures stake, kept aside as stock options for employees & executives.

VENTURE CAPITAL

GOOD WISHES TO ALL