Connect with us

Venture Capital

Angels & Demons: What To Know When Negotiating Equity Funding For Your Start-up

It is important that you don’t treat equity funding lightly. A few key points are discussed in this article for you to consider.

Daniel Van Zuydam

Published

on

angel-funding

Getting your start-up off the ground and scaling it up usually requires an injection of capital to ensure that you can get past the lean years. Many a start-up has been left to starve in the proverbial desert seeking the promised land of an equity funding raise and many start-ups have drunk from the poisoned chalice of a poorly aligned investor relationship. It is important that you don’t treat equity funding lightly. A few key points are discussed in this article for you to consider.

Hold onto your equity, it is precious

Equity may seem like an attractive way to raise funding for your business, it is easy to “create” and it doesn’t really require that much effort to exchange it for funds, but remember that with each share you give away, you are giving a little more control and value in your company away.

At first, this may not seem significant, but the more funding rounds you go through, the more you are going to wish that you had held on to more equity, especially if your company’s growth is in line with your aspirations! Ideally, an equity raise should be one of your last options for raising funds until you have at least developed your ‘minimum viable product’. An equity raise should only be used if you are really in need of funds to keep going or to jump your production to the next level; even then, only give away as much equity as you need to.

Related: Want Funding? Finfindeasy.co.za Founder Says You Must Learn To Speak The Language

Know what stage your business is at

This is really a simple principle. If you are pre-revenue and trying to create a minimum viable product, if you have to raise funding, you should seek out “Angel” or “friendly” investors who are willing to give you very favourable terms generally at a high valuation (meaning you give away less equity and control), these are often friends or family members. If you are post-revenue, you may wish to seek out venture capital funds or institutional investors to invest in your company.

He’s just not that into you

Make sure that your investor is serious about investing into your company. For institutional investors, the way that you will know when they are serious is when you receive a letter of intent or “term sheet” from them. It’s the venture capital equivalent of asking you on a date.  They are trying to say that they’d like to see how things go, but they are not committing to anything serious just yet. If after a few months of discussion, you do not get a letter of intent, move on, there are more fish in the sea.

Related: New Fund For Small Businesses To Be Developed

Know who you are doing business with

It is better to struggle through months or even years of bootstrapping than it is to have an investor relationship with someone who is completely incompatible with your business or who is going to add no value other than money.

An investor relationship can make or break your company. Don’t simply hand over your equity to the first bitcoin millionaire with a Colgate smile who approaches you.

Look for investors who want to invest in your industry and who have good connections in that field, this can be more valuable than the money that the investor is putting into your company.

Get good legal and commercial advice

It’s important to remember that an institutional investor is just as much a business as you are. They are always going to be biased towards getting the best return on their investment no matter how altruistic they may come across. This means that the commercial and legal terms, if left to them alone, will be weighted in their favour.

You may be tempted to avoid the expensive lawyers and commercial advisors, but too many startups make the mistake of being penny wise and pound foolish here. Unfortunately, commercial investment terms can be very complex and it is always advisable to have someone on the commercial and legal front sitting squarely in your corner.

Related: The Investor Sourcing Guide

In short, equity is an effective arrow in the start-up’s quiver to use when raising funding, however, it is not the only one available. If you do decide to let it loose, don’t do so aimlessly, pick a target and aim it in that direction. The more strategic you are in negotiating your equity fundraising, the more likely you are to get favourable valuations and investment terms.

About Daniel Van Zuydam: Daniel joined Dommisse Attorneys in 2017 as an associate in the Transactional Team. His areas of focus are corporate finance, mergers and acquisitions, and corporate restructuring. Having come from a background in commercial litigation, he has learnt the ins and outs of trust and company interrelated structures and has a passion for structuring enterprises in dynamic ways to suit the needs of each client.

Venture Capital

3 Top Tips SMEs Should Be Aware Of When Accessing Funding

Darlene Menzies weighs in on the top three things you should consider when accessing funding.

Darlene Menzies

Published

on

accessing-funding

1. Applying for credit facilities

Apply for credit facilities (such as a bank overdraft or revolving credit facility) when business is going well, which is when a bank is more likely to approve it. This also means you will have the money immediately available if you hit a cash flow challenges. Don’t wait until the business has hit a cash cliff to apply, as you will be less likely to qualify or be in a position to negotiate the best rate/terms.

2. Have critical documentation easily available and kept up-to-date

Create a secure electronic folder, preferably stored online, that house all of your statutory and financial documentation that funders will request from you when you apply for finance.

This includes up to date copies of your company registration documents, shareholder agreement and register, certified copies of member/director IDs and marriage certificates, tax certificate, signed customer contracts, business plan, latest financial statements, up to date management accounts etc. SME lack of finance readiness (i.e. having their documentation available for funders) is a key constraint to being able to access funding.

3. Know your credit score, both your personal credit score as the business owner and your business’s credit score

Our report shows that 61% of entrepreneurs applying for finance don’t know their credit score, yet this is one the primary evaluation components used by funders to determine the risk of lending money to the business.

It’s important that SMEs request their credit scores and address any issues that are negatively affecting them. You are permitted one free credit record per annum from the Credit Bureau. Take time to learn about how the credit system works.

Access to finance

“There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs.”— Darlene Menzies, founder of finfind.co.za

Read next: Government Funding And Grants For Small Businesses

Continue Reading

Venture Capital

Taking A Business Public Can Unlock Its Full Potential

How can business owners continue to create shared value and drive growth beyond the venture capital funding rounds to attract new investors and customers, and unlock the inherent value in their business?

Graeme Wellsted

Published

on

wall-street-stock-exchange

In the context of entrepreneurship, a great deal of emphasis is placed on the start-up phase of a business. But what happens beyond that?

Going public

Listing on a stock exchange is often the best way for a business to realise the next phase of its growth ambitions and create opportunities for shareholder and investor diversification.

Listing a company provides a more effective tool to access capital and enhance liquidity than private equity markets, as there is a much larger investor base to tap. Importantly, this pool will also include institutional investors, such as pension and investment funds, most of which are mandated to only invest in listed entities.

Reasons to list

Raised capital can be used to fund expansion or research and development, or meet other capital requirements for acquisitions. Listing creates exit opportunities for founders, shareholders and early-stage investors, and helps to spread the risk of ownership. Other growth opportunities become accessible as lenders can more accurately determine a company’s market value to determine loan-to-asset ratios.

Valuations for potential mergers or acquisitions are more objective. In this regard, a share issuance can be offered as a suitable exchange of value, rather than using cash to make a purchase or acquisition. Listing a business boosts its credibility and brand equity, which is beneficial from a customer perspective.

It helps to attract and retain the best talent from an employee perspective through the implementation of an employee share incentive scheme.

Related: What should I know about a Public Company before registering one?

Achieve consensus

But before a business lists, it is important to consider the commercial benefits and, consequently, if this is an appropriate next step. In this regard, the leadership team must first review the strategy and agree on where the business is in its lifecycle, and where it is going. For any business to be successful, the shared beliefs and purpose of its leadership team must align and there must be consensus among shareholders that the time is right to list.

Consider the trade-offs

Once this point is reached, consider the implications of taking a private company public. Firstly, business owners must understand that they are effectively giving up control of their company. They must also acknowledge that the transition from a private to public company can be difficult, with increased compliance and transparency.

Listing on a stock exchange also raises the public profile of the company. This includes greater oversight from external stakeholders, with strict reporting and disclosure requirements required by the exchange and regulators. These aspects are mandatory to ensure greater transparency, which translates into greater protection for investors.

Meeting compliance requirements

Arriving at this decision therefore requires a thorough due diligence process. This entails meeting financial reporting and minimum regulatory compliance requirements, which have potential cost and administrative implications that can prove challenging, particularly for smaller businesses.

However, it’s imperative to meet these requirements, as this ensures the business will stand up to market scrutiny and that the entity delivers exactly what it promises to investors. It also ensures the business meets the exchange’s corporate governance requirements, complies with the Companies Act, and operates in line with industry best practices.

Related: Public Private Partnerships Can Work For Entrepreneurs

Demonstrate value

This due diligence process is also vital if a company hopes to adequately demonstrate value to investors in the open market. This will help listing advisors and sponsors, whose job it is to market your company to potential investors, to more accurately determine if there is appetite for your business.

Institutional and retail investors will use this information to interrogate the business’s value proposition to ascertain the potential for growth following a listing, and determine whether the business model will deliver adequate and sustained returns over the medium to long term.

Continue Reading

Venture Capital

Need Funding For Your Vision? Give ‘Tasteful Persistence’ A Try

Zuko Tisani’s Legazy is a company that plans six international immersions for mainly start-ups, executives and members of the public. He has managed to grow his business from floundering for funding, to attracting large corporate investors. Here’s how your business can follow suit.

Diana Albertyn

Published

on

funding

Legazy was launched with the aim of playing a leading role in the South African digital economy by stimulating the trade on African innovation. Legazy is well on its way to increasing the success rate of entrepreneurs through exposure to market access, partners, media and investors. “Before we were consumers and bystanders of industry 4.0,” says founder Zuko Tisani.

“We work with large corporates and Government, speaking their language by understanding what is important to them and not promoting what we think is important,” Zuko explains.

“Our narrative is tailored to fit the specific corporate we speak to. A lot of companies make the mistake of shooting in the dark and send a generic proposal to as many people as possible.

“We also realised the return on investment for content was huge. We are well documented visually and with the corporates that sponsor our projects it makes it easier to get funding because we can tell a unique story, a big story and an emotive one that goes hand-in-hand with our proposal and separates us from others.”

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Zuko offers these top tips for start-up funding success:

How do you get people to care enough about your idea to invest?

1. Be very clear about how assisting you benefits them

Human nature is selfish. Win-win is not enough. Think more 51% to 49% — give more than you get. How is your sponsor going to be the winner of the day by supporting you? Always bring it back to the bottom-line. Whether it’s tax benefits, market exposure or adding value to their supply chain, be careful not to oversell because it can close an opportunity before it even opens. Do your homework to find gaps to fulfil or to enhance existing projects. Once you have emailed a specific request, lay out end-to-end how you will use the money and how it will benefit them.

2. Be persistent not pestering

Sending mails to busy stakeholders without response is a norm — try to find other stakeholders, who are more junior and would also have an interest in your project, to assist. Tasteful persistence is mostly rewarded — be delicate but direct in what you want; keep demonstrating you can add value and deserve the sponsorship.

3. Make the vision big and the ask small

It’s important to gain and build trust so take what you are given and build on that.

Related: Government Funding And Grants For Small Businesses

What steps can your start-up apply when approaching corporates for funding?

1. New is hard to sell and often has tentative buyers in the beginning

However, it’s worse to enter an over-saturated market where differentiation is difficult to see. A lot of entrepreneurs focus on the complete market and say things such as, ‘It’s a $10 billion industry’. Can you skew your value proposition to make a buyer believe it’s unique? And can you capture an upcoming market such as Generation Z (the coming economically empowered generation) in your offering?

2. Paper trails

If you are looking at partnering with a corporate find out where they have put their money before, and what it took for the start-up to gain access to those funds. Also look at the companies similar to yours that are succeeding — where is the money in your sector? This will also inform where you will be wasting your time.

3. It’s all seasonal

Keep a tight watch on when budgets are allocated. A lot of companies will inform you that they’re not in a good position to allocate money. Find a non-financial resource that you can be offered and leverage their partnership to gain financial support with another sponsor.

4. Know the lay of the land

The winner is the one who has the most information. If you are trying to tap into being a supplier for a corporate, know the decision-makers; know the key influencers. Your business is reliant on relationships.

As connection with anyone becomes easier, it’s easier to create solid relationships with decision-makers who can help your business with a signature. But always ensure your proposal offers the greatest value and that you do not only know the decision-maker, but everyone else who is part of supporting the sponsorship.

Read next: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending