Raising capital: A checklist for new entrepreneurs

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Ideas need capital; even companies that bootstrap eventually need to raise capital in some form sooner or later. There are few things an entrepreneur should be prepared with before raising capital or facing an investor.

Having deep knowledge of your industry, trends, and the nuts and bolts of your business is imperative. This is something an investor is definitely going to use to gauge your individual potential. Even if the business and industry are great, a heavy weightage is on the ability of the individual or team that is going to execute the plan.

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It is very safe to assume that the investors will ask a lot of questions that are driven by numbers and data. Having a strong understanding of the financials of the business is important for an investor, and in general something an entrepreneur should possess. The revenue/ product mix, margins, working capital cycles, balance sheet ratios, returns on equity, are some of the questions that might be thrown at you.

No one is going to back knowledge and numbers if it is not coupled with a strong vision. Investors want to back entrepreneurs who have a vision, a realistic dream. This part is less quantifiable, but it maybe the decision-making factor in case the investor is looking at multiple companies in the same sectors.

When you have the above macro points covered, it's important to get into the brass tax of the deal you are offering the investor. Once these macro categories are covered, you will need to be able to talk about the details of the investment.

When you’re figuring out the amount to raise, it’s a good idea to raise money that will sustain the company for at least two years. Raising capital is very time consuming for the management team, and it always takes longer than expected for the money to hit your account.

» Don’t only focus on financial valuation, figure out how the investor could add value besides the money they bring to the table

» Make sure the investors' investment time horizon and your business plan match. If you are raising institutional capital, try and gauge the life cycle of the fund that it is investing from. If the fund is in its fourth or fifth year of a seven-year tenure, the investor will likely put you under pressure to exit sooner than you anticipated

» Make sure the investor and you are on the same page with regards to their level of involvement in the company. Investor involvement can be productive for the business, but clear lines should be drawn so that the management team has freedom to build on their vision

» If you have a choice, fewer investors on the capital table is always better that having a large number of small investors

» If your business has strong visible cash flows, then using a measured amount of leverage, and going by the debt route is also something you should not disregard.

» Voting Rights

» Board Control

» Liquidation Preference

» Tag and Drag Clauses

» Anti-Dilution

» Non-Compete

» Employee Stock Options: Investors will usually want fully diluted shares, which make it harder to institute an ESOP pool, clarify this upfront.

A good idea to prepare for this is to get a sample Share Holder Agreement and review the different clauses. It is also helpful to go through the due diligence checklist of a reputed law firm. These documents and checklists will not only help prepare the data you will need to provide the investors legal advisors, but also get you thinking about all the points you will need to negotiate and agree upon.

The author is a Founder and Managing Director of SILA.