Making your firm investor-ready – Business Daily
Equity funding is where an external investor invests in your company in exchange for some ownership rights. PHOTO | SHUTTERSTOCK
There are various ways in which an entrepreneur can raise capital at inception. Today I will do a highlight on equity funding for start-ups.
Equity funding is where an external investor invests in your company in exchange for some ownership rights.
The most attractive business association for investors is a registered limited liability company. This does not mean that other forms cannot attract investors, it is just that most investors are attracted to the unique features of a company.
There is a very high demand for investors, meaning that every other business is also seeking investors. Therefore, you have to make sure that your business is “investor-ready” and packaged in such a way that investors will look your way.
There are many incubators and entrepreneurship programmes that would train you on how to get your business ready for investment.
In so far as the law is concerned, you need to make sure your investment is ready by updating your company records such as annual returns.
With the help of a lawyer, conduct legal due diligence on your company. This due diligence and other information will be requested by the investor anyway so it is better to be ready to avoid embarrassment.
There are many types of equity investors and I will highlight three types; strategic investors, venture capitalists, and angel investors. This distinction is necessary as the legalities may slightly vary.
A strategic investor invests in your business for strategic reasons. Perhaps he is motivated by market entry and chooses to invest in an already existing entity.
A venture capitalist invests in your business for profit and returns as a primary motivation. An angel investor as the name suggests is one whose investment into a business is not necessarily driven by returns but rather to support your cause.
In the case of both strategic and venture equity investors, the transaction will involve a transfer of a portion of ownership to investors in exchange for investment.
Sit down with a financial expert to undertake a valuation of the company to properly structure the deal. The main issue is considering all factors; how much should the investor purchase the shares for? What is the value of a share in your company?
The finance expert will also help you establish the return payable to the investor. Shall the investor be paid periodically (through dividends) or shall he wait to be paid a lump sum while exiting?
A lot of financial and legal technicalities go into the deal so it is wise to sit down with the experts. The lawyers’ role is to help you draft the necessary documentation setting out your rights vis a vis the investors.
The documents will give direction to issues such as how will decisions are made, how will disputes be solved, how much revenue shall you share and what the shared roles. All these will culminate into documents such as shareholders’ agreements, joint venture agreements and others.
The process of onboarding an angel investor may be similar to other equity investors’; however, the primary objective of an angel investor is to support a cause.
Many angel investors invest in ethical investments and other social impact investments such as climate change, faith-based, and others.
The key thing is to make sure your business is well aligned to the angel investor’s ask. Experts can help you in drafting the necessary material for attracting and pitching to angel investors.
Ms Mputhia is the founder of C Mputhia Advocates