Everyone on LinkedIn, Twitter, Instagram, YOU NAME THE PLATFORM is looking for funds.

There's nothing inherently wrong with it.

Except if you don't know what you are doing and why you need the funds to begin with.

Startup founders, probably like yourself, are pumping their own cash into the Startups first.

And then trying to raise money from family or friends.

That's how it usually goes.

But when do you go for external funding?

And what should you do and look out for?

This guide will answer EVERYTHING.

1) When is the Right Time?

No simple answer to that. But the one thing is:

DO NOT RUSH THE PROCESS.

I have personally seen founders who started their company 3 months ago.

And then do nothing whatsoever in the company.

And now they are seeking $5-10 million for funds.

And why?

They never answer.

An utterly wrong approach!

The goal of the fundraising is to grow the business.

It's not merely to grow the valuation of the business.

So focus on building an MVP, getting some traction/sales, and establishing some groundwork.

2) You've found the investor - now what?

Convincing someone to invest in your Startup is not the only hard part.

What's harder is making sure that the whole process is followed through.

There must be some of you who were promised funding, but the conversation fell short on execution.

Remember:

The Investors, especially VCs, won’t go merely by your pitch deck.

Instead, they would conduct their own financial and legal due diligence on your Startup.

And this is before actually going for an investment round with you.

Any issues they come across, such as compliance issues, IP disputes, policy absence, etc., will just look bad on you.

It might just contribute to downgrading the valuation of your startup, which is the last thing you want.

3) How to be Prepared against the Investor's Due Diligence?

First things first.

You need to be financially and legally sound and have a clear record.

This is important in terms of corporate governance.

The main goal of due diligence by Investors is to uncover any risks (financial and legal) related to the Startup.

Apart from the financial front, on the legal side, they look at:

1) Agreements:

Must have Employment Contracts.

This should restrict the employees from leaving and starting a competitive business.

Must also have Customer Agreements.

This should be fixed customer contracts with a reasonable cancellation time - so there is consistent revenue.

2) IP Protection:

I can't repeat this enough. IPs are your valuable assets.

Startups must have procured registration and must have appropriate IP Assignment Contracts with their founders, employees, and external contractors.

This is done to avoid any risk of dispute.

Remember what happened with Facebook? You don't want that.

3) Compliances:

The Startup must be legally sound.

By that I mean, there must be timely filing of their tax returns, secretarial compliances, and holding/ renewal of their industry licenses, as applicable.

Please note that the above list is not an exhaustive list.

The Investors will be doing their due diligence.

And any issues or non-compliance they find will affect the valuation of the company.

And in some cases, may increase the indemnification obligations of the company and the founders.

4) How can someone Invest in your Startup?

The most common way is to invest a sum of money in return for a certain number of shares in your company.

This is called Equity Financing.

But that's not the only way.

There are also several hybrid options as well.

In fact, the hybrid options are even more preferably used nowadays.

A) Convertible Options such as Convertible Note!

B) Compulsorily Convertible Debenture/ Preference Shares (CCDs/ CCPS)

C) Non-Convertible Options (which are treated as debt only).

I will be going over the intricacies of each of these instruments in some of my other posts.

So follow to stay up to date!

5) Points to Note:

1) Choose Wisely:

Select the investment instrument with care, considering legal, tax, and regulatory factors.

The wrong choice could lead to significant tax obligations.

In some cases, even 30% to 40% of the investment amount may be wiped off in tax if the structuring is not done in the right manner.

2) Start Fool-Proof:

Strong foundations are important.

Often, in the chase of product development and customer acquisition, the foundation is ignored in the process.

When you go for fundraising, and the business is subjected to diligence- these weaknesses are exposed

That's why, the legal and regulatory side of the business should never be deferred or ignored.

That's it!

Now you know:

1) When to raise funds

2) What to do after you find the Investor

3) How to make your startup Fool-Proof against Investor’s Due Diligence

4) Through which means can you get the Investment

Remember - this is a guide that I created from my personal experience and the experience of my co-founders.

Different people will give you different ideas and approaches.

But this is what I believe would work the best for your case.

Good luck!