Early Stage Funding – What Investors need to know about getting the deal done?

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I come across a lot of early stage investors – many of them are on the Equity Crest platform, and many are new to early stage investing.

There is some FUD (fear, uncertainty, doubt) among investors on how to set terms, do diligence, do deals and what they should look to protect.

Some of the challenges in the process are:

a. Our eco-system is evolving from venture like documents and process to early stage, and that transition is not yet complete.

b. Some of the existing larger angel networks have fairly long term-sheets and documents and a penchant for elements like tranching.

c. Investors are looking to cover downside using documents, which in most cases does not work in early stage equity investing.

Common missteps to be corrected:

a. Diligence – Time and expense on diligence should be commensurate with the past scale and history of the company. The most valuable part of diligence is really about having a view on the investment thesis, execution and the founders’ potential. Unnecessary time spent on historical analysis can bog down the company and impact its progress – and you run the risk of the founder closing a deal with someone else who can move faster.

{Also Read: Successful young entrepreneurs in India }

b. Affirmative rights, Director seats – Investors often ask for affirmative rights which run into a list of 15+ items, and if three investors are putting in money in the round which is greater than a rounding error, then all three of them want to be on the board. Again, you can have some protection for capital events (like raising money, forming subsidiaries, M&A), but there is no point in trying to have items that impact running of the business. Also, having a large board (including observers) at this early stage has the risk of slowing down decision making, and causing headache to founders that comes from a cacophony of advice.

c. Doubling down on Liquidation Preference and Anti-dilution – Investors often do not consider that seed round can set precedent to Series A and future rounds. So asking for 3x participating liquidation preference is going to trigger a similar demand from the next investor (probably a VC) on a much higher amount of capital. Your best downside protection is to back the best teams and not through setting onerous terms and conditions.

d. Miscellaneous – I have seen some angels inserting a clause which assures them a partial exit in the next round. I have also seen stuff like non-compete and many such. Again, the clauses won’t get you there, it’s the outcome of the next round and your relationship with the founder which might.

Above all, its about speed. Every week, every month is important for your funded company to get that edge in execution and break out. The smart founders are figuring this out with the smart investors — time to get on board.

If you would like a copy of a term sheet to use to make investing efficient please reach out to me at [email protected].

Guest Author: 

Deepak Gupta is CEO & Co-Founder of Equity Crest, a curated seed-funding platform and also an angel investor.

Related Post: Simplifying Angel Investors, VCs And Other Funding Options For Startups

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