India is quickly becoming a dominant technology hub and implementing important startup law strategies will skyrocket its success. Indian entrepreneurs are developing and innovating technology that will not only shape India, but also southeast Asia and the entire world. Investors are pouring money into Indian startups, and Bengaluru, commonly known as Banglore, is the primary city shaping the India’s technology and IT scene. It is important for entrepreneurs to position themselves the best way to raise money. We discuss the best practices in this article.
Table of Contents
The Board of Directors are Underrated Startup Law Concepts
It is very important for startups to build the best team possible. This will increase a startup’s chances of raising money because investors want to see a quality team. If a founder leaves the company, investors want to ensure the company will continue to operate. An experienced board of directors will introduce the startup to investors and bankers to help fund the business.
Business is a team sport and entrepreneurs increase their chances of receiving venture capital money by having cofounders. Co-founders will sign legal contracts such as shareholder agreements and board of directors will sign the board of director agreements. These contract will explain the ownership percentage, voting rights, and responsibilities for everyone. Often times, entrepreneurs must have pursue other funding opportunities before they can get funding from venture capitalist firms.
Funding your Startup with Three Options
Family and Friends, Angel Investors, and Venture Capitalist Firms are the primary ways to raise money in startup law.
Friends and Family Round
Your friends and family are people that are you know well and you would feel relatively comfortable with approaching for money. These are the people that want you to be successful probably more than any other group of people. Therefore, these are often the first individuals to go to when raising money.
It is very important to that you treat your friends and family with the same amount of respect that you would treat a venture capital firm when asking for money. Your friends and family have worked very hard for their money and you have to convince them to give you money in the same fashion as you would a venture capital firm.
When you are pitching your idea to friends and family, you should present your ideas and business plan through a power point slide show, sometimes they call this a deck. Some of the things you want to talk about in your pitch to your Family & Friends include:
- The problem your product or service is trying to solve,
- How will you make money,
- How big is the market,
- Who is your ideal customer,
- Financial projections, and many more.
When you are asking for money from your friends and family, you typically don’t want to ask for money where you are giving them shares in your company, particularly if you are trying to raise money from venture capital firms at a later date. Instead you’ll ask them for a loan where you pay off the loan with interest at later time in the year. You’ll treat it just as a traditional loan where you sign a promissory note in which means you are legally promising to pay back the loan with interest in full by a certain time.
A loan instead of an investment is important because you don’t want to give up ownership in your business when there are additional ways to get funding. In addition, as your company become more profitable, venture capital firms that want to invest into your company will have want to make sure there isn’t too many owners and that the venture capital firm can actually make a worthy profit and that you as the owner of the startup still have enough ownership.
But many times, it may be hard to get investments from your friends and family in the beginning because they may not take your startup idea serious. They may not be able to visual your idea and the execution of your startup as clearly as you can. And that’s okay.
When you can’t find anyone to give you money or invest into your dream, you’ll have to take can-do attitude and just start the business off yourself. You’ll use your own personal funds. You can get a part-time or full-time job and use some of that money to grow your business. Over time as you reach different milestones and your business grows, your family and friends will see how hard you worked on your goals and they’ll probably be more willing to give you a loan or convertible debt. In addition, as you reach economic milestones, you’ll attract angel investors that are looking to invest into early stage startups.
Angel Investors
Angel investors are individual investors that invest their own investor money. It is important to understand the different between an angel investor and a venture capitalist. An angel investor is an individual person that invest anywhere between $25,000 – $100,000 of his or her own money in a startup by means of a convertible debt contract. A venture capitalist firm is typically a company that invest millions into startups. While an angel investor uses his own money to invest, the venture capitalist firm uses the money of others to invest into startups. The venture capitalist firm receives money from:
- Governments,
- Corporate pension funds,
- Large corporations,
- University endowments,
- Charities,
- Institutional investors, and many other places.
Also, in contrast to the Angel Investor that primarily uses convertible debt, which is basically a loan that can convert into equity in the company, venture capitalist firms only makes investments for equity or ownership of the startups.
Venture Capitalist Firms
The venture capitalist firm wants preference/preferred stock in the startup company, through a shareholder agreement, in exchange for the investment in the startup. Preference stock allows the holder of preference shares to get paid first before common ordinary stock holders get paid. The venture capitalist firm is investing millions of dollars and want to ensure it can minimize its risk of loss as much as possible. One way of doing this is by ensuring that profits come to them first before they go to the startup.
Startup Funding Progression
The Startup Funding Progression typically involves the startup founders using their personal money to reach a milestone, then they’ll get money from family and friends to reach another milestone. Next they’ll receive convertible debt from an Angel Investor, and lastly they can begin receiving funding from venture capital rounds. The first round of venture capital funding is called Series A, then the next round will be called Series B and so on. After receiving funding from the venture capital firms, the startup will typically look for an exit strategy through either an initial public offering where the company is places shares on the stock market or an acquisition where a larger company comes and buys the startup.
The Future of Startups in India
The world of Venture Capital is an exciting environment where a ton of money is being raised and invested into startup businesses. If you have a business idea, you can begin the process of pitching your idea to receive funding. You might have to start your business using your own personal funds, but that’s ok. Never give up on your dreams and work hard to make them a real.
For more India and Asian legal topics, please visit out APAC Law Section.
