All this talk of angels and venture capital may be entirely unfamiliar for those starting a new business venture for the first time. Here I want to explain these terms and provide some clarity for those who think an angel investor comes from the clouds, or that venture capital is some type of financial scam. Those familiar with these terms may still want to know some of the nuances of each so please read on.
angels from the clouds
An angel, when used with reference to funding a new business, is actually an individual investor that typically invests at the very early, pre-revenue stage of a business. Like any investor, they want to see a return on their investment but they’re also motivated by a desire to see new and innovative businesses succeed – sometimes for the sake of innovation itself.
A typical angel investor will invest in a business that’s part of an industry that they understand intimately and are probably still involved in day-to-day. They will more than likely want to offer advice and support to the business they have invested in so it’s not just about the money. If you’re seeking money from an angel investor then it is perfectly normal to allow them some type of influence regarding strategy and direction.
The amount of money you might expect from an angel investor is in the range of $10,000 – $100,000. This could be even more if they are from an organised group of angels like the Australian Association of Angel Investors (AAAI). AAAI has sub groups in just about every major city in Australia.
In summary, an angel investor is:
The venture capitalists
So now your business is up and firing and you’ve built a solid platform that’s generating cash. You might now be in a position to seek funding from a venture capital fund. A venture capital fund is money that is managed on behalf of others – typically large institutions. Some venture capitalists like to invest in a business immediately after a business has moved beyond the initial angel investor stage. Others prefer to wait a bit longer before they invest and will only be interested after a business has received a first, or even second round of venture capital investment.
Venture capital firms will be focused heavily on financial returns and businesses that offer a lot less risk than early stage start-ups. While angel investors limit their investments to relatively small amounts, venture capitalists tend to think of a starting point for funding to be around $1 million.
You will find that a venture capital fund expects to exercise more direct control over your business. They will do this by setting achievable milestones for your business and by having at least one seat on your board.
In summary, a venture capital firm is:
Finding the right investor for you
Understanding the difference between an angel investor and a venture capital firm is pretty straight forward. You probably already have an idea of the one which is right for your business. Finding them and getting them to invest in your business is the difficult part. Those seeking Angel investment in Australia can get started with websites like:
CHAMP Ventures or CVC Ventures among others.
In addition, there are service providers that offer introductions to both Angels and venture capital firms like Wholesale Investor – where I currently work. Wholesale Investor has a subscriber base of over 8,600 High Net Worths including retired CEOs, C-Suite Execs, Family Office trusts, Entrepreneurs, and others.
Before you even think about raising capital for your business, there are three key questions you need to answer from the perspective of an investor. Every individual investor no matter what the size of their portfolio, or area of expertise, will be thinking something along these lines (in their own mind):
1. Will I lose my money?
Guide for business owner:
2. When will I get my money back?
Guide for business owner:
3. Will I make money?
Guide for business owner:
Assuming you have a unique product or service that has a market, an investor will basically want to see that you have everything at stake. The founding father of venture capital in Australia, Bill Ferris, who now runs CHAMP Private Equity went as far as asking, “Do the owners of this business have their life on the line for this?”. He used this as part of his checklist when assessing potential investment in private companies so it is no exaggeration.
If you can answer the questions above with objective facts then you will be in a much better position to raise capital from Angel Investors, Venture Capital funds, High Net Worth individuals, Family Office trusts, or any other form of surplus capital.
A shareholders’ agreement, or ‘business will’, is an agreement that attempts to regulate the conduct of those starting a new business venture. It is essential too for those seeking funds from new investors.
I wanted to focus this week on seven must-have terms for any shareholders agreement. To do this I spoke to Kristie Piniuta from Kubed Legal in Melbourne. A big thanks is due to Kristie who put together the list of seven based on her broad depth of experience as a corporate lawyer. This has included time spent working in-house for Boost Juice alongside Janine Allis. The seven must-haves include:
1. Only shareholders that hold more than a certain threshold or % of shares, say 20%, should be entitled to appoint a director.
You don’t want a new shareholder exerting too much control on the direction of your business if they are only a minority shareholder. A condition like this also increases the stakes for new investors and ensures that a larger investment is rewarded with greater authority via more seats on the board.
2. When a shareholder exits there should be an obligation on the director appointed by that shareholder to resign.
If an independent director has been appointed by a shareholder who later exits their investment then it would make sense for the director appointed by them to stand down. Their representation may no longer be justified if they represent the interests of someone who is no longer invested in your business.
3. Director decisions versus shareholder decisions.
You need to carefully consider what decisions are at the mercy of directors and those at the mercy of shareholders. For example, you don’t want to have to call a shareholder’s meeting to make a decision on the appointment of a new CEO. At the same time you don’t want to let a board of directors veto any important decisions made by shareholders. Jurisdiction on capex, business plans, budgets, asset purchases also need to be considered.
4. If a shareholder or director of a shareholder entity dies or suffers permanent disability, other shareholders should have a right to buy their shares
This situation occurs more often than you might think and can be overlooked very easily. If there is a clause in your contract that addresses this situation then it makes a traumatic event a lot less ambiguous. Ambiguous in the sense of what happens next for shareholders of the business.
5. Carefully consider events of default
A shareholder in breach of a shareholder agreement is said to be in default. It is important to include a right for non-defaulting shareholders to purchase the defaulting shareholder’s shares which if appropriate, may be discounted from fair market value (up to 20% in some cases).
6. Consider including drag-along and tag-along rights
Drag-along rights enable a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. This ensures a clean sweep of of minority shareholders in the event of a full sale or acquisition.
Tag-along rights are used to protect minority shareholders. If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company.
7. Include non-compete and confidentiality provisions.
This is especially important for businesses with a lot of intellectual property. That’s not to say it is any less important for other businesses who have lots of cash flow and very little IP. Non-compete periods have to be reasonable in scope and duration to ensure enforce-ability. A confidentiality clause is obvious for a number of reasons and it is a commonly used for other contractual agreements like employment agreements and non-disclosure agreements.
The cost of a full shareholder’s agreement “starts at about $A2,000-$A3,000″ according to Kristie from Kubed Legal. This is the bare minimum and the cost will increase depending on the complexity and number of shareholder requirements.
Hopefully the terms above highlight a few key points for business owners embarking on a capital raising mission for the first time. If all parties are fully informed and provisions are drafted appropriately, a shareholders agreement should be able to sit in the bottom drawer gathering dust until a situation arises where it needs to be consulted. The cost of the agreement pales in comparison to the cost of a legal dispute if an agreement is not put in place.
Please feel free to contact Kristie at Kubed Lawyers at firstname.lastname@example.org if you have any further questions or if you need a shareholder’s agreement drafted.
This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a corporate lawyer or adviser.
I came across an article recently on Forbes.com written by Alison Johnston. Alison is the CEO and co-founder of InstaEDU, an online education business that helps students get high-quality, one-on-one academic support, on-call. Alison talked about 5 tricks for finding investors for a startup. The article was written based on her personal experience raising capital for InstaEDU. I thought it would be useful to adapt the article for Australian start-ups.
Alison made a good point early on that even when you’re ready to start talking to investors, one of the most challenging parts can be just that: actually talking to investors. Most venture capitalists and angel investors see dozens of pitches every month and simply don’t have time to meet with everyone. To make it more difficult, it’s not uncommon for first-time entrepreneurs to need to speak with 50+ investors before closing a round of funding. The good news is that there are now more resources than ever to help you source investors. Here are five tricks that Alison used to get meetings with the right investors for InstaEDU.
1. Build a profile of your company and list it
Services like the Australian Investment Network cater for entrepreneurs looking for startup funding in their business. A site like this is a good way to both learn about investors and for them to learn about you. Creating a profile—including specific info about your company, product, and team members—makes it easy for people who are interested in your space to find you.
Another good site is Angel List. There a number of Aussie startups on this site. Once you’ve completed your listing on Angel List, share your profile with your friends and professional acquaintances and request references. Send a personal note to your followers to try and start a dialogue with them.
2. Create a list of investors you would like to meet with
If you are fortunate enough to get some followers for your business via a lisiting or other method then you want to focus on those investors who are going to be a good fit for your business. The chances of raising equity funding via a single meeting are pretty slim so being to restrictive on those that you meet with is not recommended. Cast the net wide.
On sites like AngelList you can make a list of people who have invested in the sector which you operate. You can take this to list other entrepreneurs and ask for their thoughts on who you should add or remove from the list, based on their experiences. Entrepreneurs who’ve been there/done that are an invaluable resource for helping you identify potential investors. They can also flag investors known for being difficult to work with or who aren’t actively investing. Put a list of people into a spreadsheet and include their sector of expertise (when applicable), mutual connections, relevant investments, location, and any other notes (e.g. has a wife and 3 kids).
3. Crawl your networks
Investors see hundreds upon hundreds of pitches. If you can get a warm introduction via a common contact then you will be in a much better position to raise capital. Once you have a list of investors you’d like to meet with, go through it one-by-one and see if you have any mutual connections. If so, bonus. Send a 3-4 sentence pitch on your company for use in your matchmakers introduction email.
4. Manufacture your own introduction
Of course, there will likely be some investors who you can’t get an introduction with. Here you need to be more thoughtful and selective about who you reach out to. You want to show that you’re not just sending out hundreds of cold emails to investors. For example: “Hi John Smith. Between your investment in Company A and your involvement with Project B, I couldn’t help but reach out and introduce myself.” Have a very specific reason for reaching out to an investor when using a cold email. You could end up looking like a turkey if not.
5. Give investors a reason to reach out to you
Never forget that investors also want to find great companies. So this process goes both ways. Make sure you spend some time putting yourself out there. Even if your product isn’t live, you can still generate attention for your team and your mission via thought leadership. Writing some guest posts for industry blogs or getting involved with local networking clubs is a good start. Don’t forget your own personal blog.
Take a leaf from the Stoics
Alison makes another good point at the end of her article: YOU ARE going to hear a lot of “NOs”. Be prepared to get turned down by investors or not hear back at all. At the same time, don’t be afraid to follow up in a professional manner. If you don’t hear back in a week, send a quick follow up. After that, continue following up if and when when you have news to share (e.g. a product launch, key metric that you hit, commitment from a notable investor). This also applies to investors you’ve met with but haven’t heard from since. Just remember thought that each NO gets you one step closer to a YES! Happy capital raising and thanks to Alison Johnston for the insight.