For many entrepreneurs, the issue of funding and specifically, how to establish contractual relationship and convince a first inverter is his great unfinished business. I have particularly been in contact with many entrepreneurs who have this problem (family, friends, clients …). All agree that it is a really complex process and that in many cases important bugs that have had much impact on the development of a company or startup committed. This degree of difficulty is normally defined by:
- Lack of investor world know well how works a business angel, types of investors, what is a “venture capital” amounts that move, while normally an investor has a portfolio startup …
- Few resources: Unable to allocate a lot of money makes it possible to not hire a lawyer in the matter.
- Lack of experience: You just noticing a lot when loose “a phrase that will ruin your chances of getting investment”.
- Unequal situation on the negotiating table: We can summarize that the entrepreneur is in a hurry to have the money and the investor instead often “play with time” for better conditions.
If you want to look in some detail, there are different types of errors that I would like separately:
Errors of attitude and perception of investor
The first thing is to think about and locate a professional investment in startups. This is a man / to access an investment with “some risk” in exchange for a% of a company with the aim of trying to multiply x4, x5 or x10 the amount invested. Instead of investing in the stock market it decides to do so in a more risky way to change a good “slice”. That said, it leads to the following notations:
- Do not mistake a perched “initial sympathy” to think that you can be friends. For very good relationship you have, if you have to make a decision on their economic benefit and harm you, it will. And do not take it personally. They are businesses.
- If you know your target well and often can play against the entrepreneur, we must not give more information to the investor than is strictly necessary.
- Cordiality, professionalism and caution are your weapons to not give a misstep.
Errors in the time and forms
There are many startups need investment, this leads to the following errors:
- Said by themselves, the best way to apply is through references and competitions, campus forums and entrepreneurs.
- Another classic mistakes and offered without can offer “metrics” of the business. To attract investment today is necessary to provide actual numbers of tests or the platform already in operation. A metric I mean CPA (cost of acquiring a customer), average purchase of a user, estimated billing…
Errors reflected in contract
The so – called “term sheet”, entrepreneur-investor agreement requires expert advice. Especially considering that the investor is much more used to these agreements and knows the opportunities to achieve better conditions for their personal interests. Here are some points to consider:
- Errors in the “pre-money” / “post-money” valuation and the corresponding dilution of the shares. The pre-money valuation is the economic value that is given to the startup before receiving the investment. The error is often not letting reflected clearly how the actions of the entrepreneur after the capital injection are diluted.
- Do not set the salary of the entrepreneur in all sections billing. This error is common and deadly because it can give the company facture million and entrepreneurial follow with the same starting salary.
- The reserved matters: This point reflects how important decisions within the startup will be taken: contracts, settlement of actions…
- Other elements such as liquidation preference (who gets the money sooner if a sale occurs), right drag or right accompaniment.
Errors in the election of an investor
The essential point in this election is that an investor can not only make money really can also influence:
- Strategic alliances for the startup.
- Internationalization process.
- Recruitment of key positions.
Therefore, an entrepreneur with vision must choose the option of incorporating “smart money” in your project.
This is already a personal opinion but I believe that many entrepreneurs are missing valuable information on the operation of the inverter ecosystem. This can be a crucial point to address negotiation processes with guarantees and not making too many concessions to the principle that harm to get a more than fair “reward” for the entrepreneur who has put everything in place and has risked much in his personal life and professional.
Do you think that many mistakes are made in this field? What are the most common mistakes for you?