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27 - 29 : The Complete 35-Step Guide For Entrepreneurs Starting A Business

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27. Understand These Key Points About Seeking Venture Capital Financing

Startups seeking financing often turn to venture capital (VC) firms, which can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more.

Venture capital financings are not easy to obtain or close. Entrepreneurs will be better prepared to obtain VC financing if they understand the process, the anticipated deal terms, and the potential issues that will arise.

To understand the process of obtaining VC financing, it is important to know that venture capitalists typically focus their investment efforts using one or more of the following criteria:

  • Specific industry sectors (software, digital media, semiconductor, mobile, SaaS, biotech, mobile devices, etc.)
  • Stage of company (early-stage seed or Series A rounds, or later-stage rounds with companies that have achieved meaningful revenues and traction)
  • Company location (e.g., San Francisco/Silicon Valley, New York, etc.)

Before approaching a venture capitalist, try to learn whether his or her focus aligns with your company and its stage of development.

The second key point to understand is that VCs get inundated with investment opportunities, many through unsolicited emails—almost all of those unsolicited emails are ignored. The best way to get the attention of a VC is to have a warm introduction through a trusted colleague, entrepreneur, or lawyer friendly to the VC.

A startup must have a good “elevator pitch” (as discussed in point #6) and a strong investor pitch deck (as discussed in point #18) to attract the interest of a VC.

Startups should also understand that the venture process can be very time consuming—just getting a meeting with a principal of a VC firm can take weeks; followed up with more meetings and conversations; followed by a presentation to all of the partners of the venture capital fund; followed by the issuance and negotiation of a term sheet, with continued due diligence; and finally the drafting and negotiation by lawyers on both sides of numerous legal documents to evidence the investment.

VCs usually want to see that your business has made some progress and gotten some traction in the market; they will typically not fund a very early stage company or just an idea. For that, you are better off seeking angel investors.

Most venture capitalists won’t agree to sign an NDA, so don’t bother asking.

For a comprehensive article on the venture capital financing process, see A Guide to Venture Capital Financings for Startups.

28. Pay Attention to Your Business Contracts

Business contracts are legally binding written agreements between two or more parties. They are an important part of business and such agreements need to be created and/or negotiated carefully.

While smaller businesses will often conduct business based on informal handshake agreements or unspoken understandings, the more that is at stake, the more essential it is to have a signed contract. A contract serves as the rules that must be followed by both parties. It presents each party with the opportunity to:

  • Describe all obligations they are expected to fulfill.
  • Describe all obligations they expect the other party (or parties) to fulfill.
  • Limit any liabilities.
  • Set parameters, such as a time frame, in which the terms of the contract will be met.
  • Set terms of a sale, lease, or rental.
  • Establish payment terms.
  • Clearly establish all of the risks and responsibilities of the parties.

A contract is, in essence, a written meeting of the minds. While it is typically drawn up by one party and favors the needs and requirements of that party, protecting them from most (if not all) liabilities, it should initially be thought of as a work in progress that changes and grows as each party contributes prior to signing, after which it becomes an official document. “Consideration,” whether it is monetary or a promise to do work or provide a service by a specified date, is at the root of a contract.

The term “standard contract” is more myth than reality, and too often people simply sign on the dotted line without reading or negotiating the terms of a contract. A startup has to make sure it is comfortable with all of the terms of the contract, and depending on the deal dynamics, almost any term is negotiable.

Consideration, compensation, ownership rights, liability, and risk are all areas that need to be worded carefully. You should seek out help from a qualified attorney who is experienced in contracts to make sure you have covered each of these areas in a clear manner.

The contract itself should stipulate how it shall be enforced and what actions can be taken if one party fails to meet their obligations. It is often to the benefit of smaller businesses to have a confidential binding arbitration clause to resolve any disputes.

The key contracts that a startup should have as its own form of “standard contract” (drafted in the startup’s favor) include:

  • Sales or service agreement
  • License agreement
  • Offer letter to employees
  • Consulting agreement with any independent contractors (you want to make sure that you will own the intellectual property rights for anything they develop for your business)
  • Confidentiality and Invention Assignment Agreement for employees and independent contractors
  • Non-disclosure agreement

See 10 Key Contracts for Small and Growing Businesses.

29. If You Plan to Lease Office Space for Your Business, Focus on These Key Issues

Leasing office space is one of the largest expenses a startup can incur. Negotiating the best lease possible can save your company enough cash to hire a few more employees or launch a new marketing campaign.

Keep in mind that your ability to negotiate an office lease is dependent on how much leverage you have. Do your homework. Are other companies vying for the same space? Has the space been vacant for a long time? Factors such as these may mean the difference between you calling the shots, or a landlord insisting on onerous terms throughout the lease process.

Because no lease is standard, here are some suggestions to help you become a little more lease-savvy and negotiate a favorable office lease for your startup:

  • Length of lease term. Landlords are typically willing to make concessions for longer-term leases. However, your company’s needs may change and you could find yourself locked into a lease for an office space that is too small, too big, or with rent that is above-market if demand for space subsequently declines. Try to negotiate a shorter-term lease with renewal options—a two-year lease with a two-year renewal option, for instance, rather than a four-year lease.
  • Tenant improvements. Your new space may need some improvements or alterations (a new paint job, new carpeting, a reconfiguration of the space). Which party will pay for these improvements depends on how tight the commercial office space market is in your city. Most form leases stipulate that the tenant can’t make any alterations or improvements without the landlord’s consent. Ask for a clause that says you can make alterations or improvements with the landlord’s consent, and that the consent won’t be unreasonably withheld, delayed, or conditioned. Often, you are able to negotiate a “tenant improvement allowance,” which is an agreed-upon sum of money that the landlord will provide for the improvements and alterations you would like to make.
  • Rent and rent escalations. Some landlords will give free rent for the first month or two of a lease. Fixed rent over longer-term leases is relatively rare. Sometimes landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange for a CPI rent increase that does not kick in for at least the first two years of the term. Then, try to get a cap on the amount of each year’s increase. If you have to live with a rent escalation clause, try to negotiate a predetermined fixed increase; for example, a rent of $5,000 a month the first year that would only increase to $5,200 a month the second year and $5,400 a month the third year.
  • Repairs, improvements, and replacements. Be aware of a clause that says that at the end of the lease you must restore the premises to their original condition. Try to negotiate a clause that states the following: “The premises will be returned to the Landlord at the end of the tenancy in the same condition as at the beginning of the tenancy, excluding (1) ordinary wear and tear, (2) damage by fire and unavoidable casualty not the fault of the Tenant, and (3) alterations previously approved by the Landlord.”
  • Assignment and subletting. Startup companies should negotiate enough flexibility in the assignment and subletting clause to allow for mergers, reorganizations, and share ownership changes. Watch out for a clause that says a change in more than 50% of the company’s stock ownership will be deemed an assignment that is prohibited without the landlord’s prior approval. As your company grows and new people invest in it, this clause can be inadvertently triggered.
  • Try to avoid one-sided lease provisions. Landlords use form lease agreements that can be very one-sided. Be on the lookout and negotiate on these types of provisions that are heavily landlord-favorable:
    • The landlord is given the right to pass on to the tenant, without limit, increased operating costs such as property taxes, building repairs, or insurance premiums.
    • The landlord tries to lease the premises “as is” or tries to disclaim responsibility for compliance with environmental laws (e.g., asbestos issues) or the Americans with Disabilities Act.
    • The landlord tries to require the tenant pay any tax increases resulting from a sale of the property.
    • The landlord tries to reserve the right to terminate the lease at the landlord’s convenience.
    • The landlord tries to prohibit the possibility of subletting or assignment.
    • The landlord insists on personal guarantee of the key shareholders of the company.
  • Consider using a tenant broker. A good tenant broker can be invaluable and will represent your company’s best interests. He or she will educate you on the current market; locate spaces that meet your stated parameters; arrange tours and accompany you to view these available spaces; and then prepare offer letters and negotiate with landlords for all spaces that work best for your company.

See How to Negotiate the Best Office Lease for Your Startup.

forbes.com

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