One of the functions HPA performs for entrepreneurs is getting companies to a stage where Venture Capitalists will come in and make an investment. In order to scale, the typical startup will need a life cycle strategy when it comes to funding. It goes something like this:
2. Friends and Family
4. Series A
5. Series B, C, D, E and rounds until exit.
Exits are generally an acquisition, not an initial public offering.
One of the pieces of the company that VCs look at is the capitalization table. Entrepreneurs want to make sure their cap table is clean. If it’s not, VCs will have to spend an inordinate amount of time re-negotiating with other members of the cap table in order to make an investment. That becomes an objection and the entrepreneur could likely lose them.
In conversations that HPA members have had with VCs, they always stress that they want a “clean deal”. This means a clean cap table and term sheets that aren’t filled with onerous terms.
John Greathouse wrote a nice article about 8 Deal Breakers. If you have raised money, or are thinking about raising money you should read it. Here are the 8.
1. Junked up Cap Table
2. Untenable Bridge Terms
3. Band of Brothers
4. IP Confusion
5. Legal Landmines
6. Geographic Dispersion
7. Way Out Sourcing
8. Double Agent
It’s great advice. Read the whole article. HPA has seen companies from time to time that have some of these mistakes. They can be thorny to iron out because usually it takes attorneys to do it. That means spending capital on something that doesn’t really scale the business.
As HPA has said before, it’s extremely important that startups use attorneys that are well versed in Venture Capital. Lots of attorneys say that they are, but check references before hiring them.