In this lesson, we're going to talk about raising capital for your company through venture capital. To start off there, we'll introduce other sources of capital that you may pursue in terms of raising money for your company. Then we'll go through the stages of funding that you may want to consider as a business owner. Then we'll talk about some pros and cons of VC funding, some of the documentation that you want to make sure you have available for potential VC funders. We'll spend a little bit of time talking about placement agents and some of the things that as a business owner, you may want to consider when engaging placement agents and then we'll have some best practices for VC funding. There are many ways that you can fund your business, right? You can partner with other companies, or other third party organizations through strategic alliances or joint ventures. You can seek federal financing through grants or loans from the federal government. You can self finance your business through bootstrapping, or loans from a bank. You can get money from private investors like friends or family or angel investors, but you also can seek funding through institutional investors like venture capitalists. And that's what we're going to spend some time talking about in this lesson. The venture capital funding is essentially seed money from professional investors for investment in new or growing businesses. And a highlight professional investors here, because folks who are VCs their job is to invest in companies. So they know the markets, they know the technology areas that they're investing in, they know the securities laws, they know how to ask for appropriate equity ownership, they're very skilled in these areas. And as a new business owner, you will be engaging with someone who does this professionally. And so I want to highlight that because these guys have more knowledge, they have institutional leverage when it comes to bargaining and you want to keep that in mind. So as you're engaging with a venture capitalist because of this kind of unequal balance of leverage, you want to make sure you get help from other professionals who can be an advocate for you in these types of negotiations. The stages of funding as you're raising capital for your company, you'll do it in stages. So first, you'll have a seed funding. This is usually the earlier amount of money that you're raising just to kind of get the business concept off the ground. VCs typically don't participate in seed funding. The concept has not been proven yet. You're really just trying to ensure that you're able to bring this idea to fruition. So after you've kind of gotten past that stage and you have a concept that is provable, you may want to start hiring key employees or investing in research and development to really figure out whether you can make a product out of this. That's where seed, what we call seed A funding comes in. This is the first round of funding from venture capitalist. And venture capitalists at this point, understand that the business concept is viable and the company may need more money to do R&D, and to hire key employees to move the business forward. The next round, we may call Series B or the second round of VC funding. This is when you have a business, you have a product that you're selling but you're not quite turning a profit yet. And so what series B funding is designed to do is to pump some more money into your business, so that the business goes from not just selling a product but also turning a profit. And then finally, late stage funding. This is when your business is fully operational, it's turning a profit, and investors are late to add more money to the business and to try to get some ROI on their investment. Now, the pros of venture capital funding is that these institutional professional investors, have the ability to bring large amounts of capital to your business, and they can do so through multiple rounds of funding. Series A funding, series B funding, late stage funding. But also as we said earlier, VCs are very skilled in the area in which your business may be operating. And as a result, they can bring additional expertise and strategic value to your business. And oftentimes, VCs want to make sure that they're bringing that expertise and strategic value to your business, because they have a vested interest in your business doing well. Now there are some drawbacks to venture capital funding. As venture capitalists because they have a huge investment in your business, they typically insist on control and active participation in the management of the business. They want to have someone on the board of directors, they want to make sure that they're participating in key decisions on behalf of the company. There's also an equity dilution issue with respect to venture capitalist, because they're going to want an equity ownership in the business. And as a result, your equity ownership will be diluted as well as the equity ownership of previous investors. Venture capital also insist upon restrictions on future funding. They want to make sure if they're investing now, if you're going to be raising additional funds later and issuing additional ownership in the company, they're going to want to make sure that they can participate in that to ensure their level of equity ownership. VCs have a heavy emphasis on return on investment. And so if they invest in your company, they're going to want your company to do well to turn a profit, and to help them realize a pretty big return on their investment. Oftentimes VCs, they're beholden to their individual investors. And so they want to make sure that your company is going to turn a pretty large return, so that they can in turn give a return to their individual investors. And often time as we've said before, VCs have a ton of leverage in negotiations. They have a lot of money, your company needs the money. They have a lot of knowledge, your company's religious getting started in this space. And so you want to make sure that you understand the relative bargaining power and leverage, when you're negotiating with VCs. The VCs will insist that you have a certain documentation in place. This includes the articles of incorporation and bylaws for your company. So when you started your corporation, you had to file an articles of incorporation in the state in which you registered. That articles of incorporation and the bylaws, which is how your document that outlines how your company will operate. VCs are going to want to see that, so they understand exactly how your business is being operated. Any board resolutions. So your initial board of directors would have taken several steps to kind of get the business up and running. VCs are going to want to see all of those resolutions. They're going to want to see your tax ID papers. Any invention assignments or employment agreements you have with your early employees, they're also going to want to see any securities filings. So if you've issued any securities prior to VC funding, and you filed appropriate papers with the Securities Exchange Commission or other securities related entities in the state governments where you're operating, they're going to want to see all of that documentation. Let's talk a bit about placement agents. The placement agents are similar to real estate agents with respect to the sale of real property. Placement agents serve a similar role with respect to the sale or transfer of securities or equities. There are rules around solicitation and placement agents have to follow those rules. One of the primary rules is that you aren't able to solicit any VC or any investor, who you don't have a previous relationship with. And so you want to deal with the placement agent who has a good book of relationships with investors. So to increase the chance of you landing an appropriate VC, placement agents charge a commission anywhere from 7-15% of the amount of money that they raise, and you typically are only going to use a placement agent when you're in this round of funding VC funding. And that's because you're raising a large amount of money, because you're raising a large amount of money through a VC and a placement agent is going to get a commission of that. Oftentimes, you want to have an engagement letter in place before a placement agent starts acting on your behalf. The way this typically works as placement agent will have a standard form that they will get you to sign. You want to make sure that you read and understand that engagement letter insist upon the commission that makes the most sense for you. Make sure that engagement letter is very clear about who the placement agent will be soliciting, and how the placement agent will be soliciting them. Make sure the engagement letter clarifies that the placement agent has all the appropriate licenses with the right state and Federal government agencies, to do business in the state in which he or she may be soliciting funds. All of this will ensure that you are best protected with respect to all of the security regulations, around the transfer of stock or equity or securities in your business. As a best practices, the first thing in terms of being able to secure venture capital funding is ensuring that your business is in the right form. Now, VCs typically only do business with corporations, because they themselves are large institutional investors. And it's the benefits of dealing with a corporation or what's attractive to VCs. So if you establish your business as an LOC, for example, before engaging in venture capital funding, you may want to convert your LOC to an S corporation or a C corporation in order to be suitable for most VCs. And then you want to do your homework on VCs. You want to figure out where have they funded, what types of business entities have they funded? What success have they achieved for the entrepreneurs that they've invested in? This will help you decide whether a particular VC is a good fit for your business objectives, before engaging in a funding round with the particular VC. So in summary, raising money for your company, it's very important thing but it requires attention to some very stringent legal requirements. There's various raised to raise capital. Each has its own pros and cons. Venture capital, this is the primary source for large amounts of capital raising, but it comes with a lot of strings. VCs are going to want control and management of the company. They're going to want an equity ownership in the company. They're going to want to have restrictions on how additional rounds of funding may play out. So while it's beneficial to have the large amounts of capital injected into your business operations, you want to make sure that you understand the strings that are attached. And as always, if you're engaging in the sale or transfer of equity or other securities in your business, you want to make sure that you're getting help from a very experienced lawyer and securities before engaging in those types of transactions.
