Start-ups are a house of exceptional and innovative ideas which require much more to be monetized.
Monetisation needs bring strategies for funding to the forefront. Investors, who will likely invest in your idea may expect different things from their investment, but most will ask for a detailed plan of business or sureties. Either case, requires organizing your business through agreements and other essential documents which lead to good capital generation. Some indicators on documents required for funding your business, in this article.
WHAT IS CAPITAL RAISING?
A process through which a business raises money, to fund its expansion and operations needs. As a business owner, raising capital will be one of the core challenges you will have to overcome.
Start-ups face an impending need to raise capital as cash flow remains a challenge for a new business. External source funding has some nuances which have to be mastered.
Capital raising is also the next important phase where it is important to involve legal contribution to the documents you will use to negotiate with third parties for investment and offering share in the equity pie.
HOW THE START-UP FUNDING PROCESS WORKS?
The funding typically has 2 categories:
- debt finance or
Debt financing operates as a loan borrowed by your business with interest rate and repayment schedules. Failure to repay have different forms of amortization instruments which the lender may hold, including taking over part/ whole of the business. The Insolvency Laws in India, have offered significant powers to lenders in terms of recovery and restructured recovery through asset reallocation. For reason as these, a Start-Up rarely should opt for the debt route as its first preference to raise capital.
Equity financing, definitely the more challenging route, but brings in the promise of making the business truly “Unicornish”. If as a owner, you achieve this, it will mean you have secured the power of capital to back your business, offer mentorship and above believe in you to make money and let the investor have some too. This is the level when as a small business you will start looking at investors/shareholders on the same table as you.
DOCUMENTS REQUIRED FOR RAISING CAPITAL
None of this is possible efficiently, unless you have started looking at some essential legal documents:
- Term-Sheet -It is probably the first a non-binding legal document you will sign as a business owner, outlining the basic terms and standards of an investment. It serves as an easy-to-understand document and lawyers use this to convert the intent into more legally enforceable contracts. There is typically a small time frame to exit the deal without incurring liability in Term-Sheets.
- Investment Agreement – This, sometimes doubles up as Investment and Shareholders Agreement. Even as an Investment document it will essentially record the business exchange of investment for purchase of equity. At a high level, it outlines the rights and responsibilities of the investors and applies restrictions on their powers in exchange for the investment being made.
- Business Loan Agreement –Some investments, like may be Banks or financial institutions for MSME prefer the returns in the form of interest as opposed to share in profit. This reduces the risk for the lending entities and to a degree keeps the business owners vigilant to return.
- Shareholders Agreement – This is the most important document which controls the relationship between the shareholders, if you have reached this document then it means the investor is a shareholder. This will be the document controlling you’re the operation and management of the business with details of protecting your business for you and minority shareholders rights.
- Subscription Agreement –It is an application by investor to join a limited partnership. The importance and use of this is determined based on needs of the company, industry, company size, etc. It includes details of the transaction, the number of shares being sold, price per share and Confidentiality terms.
- Asset Purchase Agreement – Not really used by Start-Ups (as the asset base may not be too high as a start-up), but deals where assets are being acquired, including fixed assets like buildings, plant and machinery and intangible assets such as intellectual property rights or the goodwill, this document makes those possible.
- Share Purchase Agreement – The document governing purchase of equity in your business. Upon execution of this, the investor is now officially on your Capital Table/ Cap Table.
A start-up can demonstrate its commitment by having legal documents in place for even its existing Shareholders and keeping the Cap Table simple. This assures the potential of a smooth investment and ignites the interest of the investor in the correct direction.
A start-up, once decides to go for seed funding from different investors, it will have to consider the legal documents which pave the way to a successful investment. This also is the first opportunity to get acquainted to the legal documents essential to take your business to the next level.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: docpro.com, blog.ipleaders.in, legalwiz.in