1. What Do Venture Capital Firms Finance?
2. How To Obtain Capital Firm Financing
3. Venture Capital Term Sheet
4. Valuation of the Company

Venture capital shares are the financial resources investors receive for helping small businesses and startup companies that have a potential for increased long-term growth. These shares represent an important capital source for entrepreneurs who typically have difficulty obtaining financing from risk-averse banks.

What Do Venture Capital Firms Finance?

Venture capital firms provide startup businesses help in a variety of ways, including capital, introductions to potential partners, customers, or employees, and strategic assistance. Getting financing from a venture capital firm is not necessarily easy. It's helpful if an entrepreneur is well-prepared and understands the venture capital financing process, the potential deal's terms, and any other issues that may come up.

How To Obtain Capital Firm Financing

In most cases, venture capitalists concentrate their investment pursuit search based on one of these factors:

  • Early-stage seed or Series A round startups.
  • Later state funding for companies that have already achieved traction and meaningful revenues.
  • Specific industries like digital media, semiconductor, software, biotechnology, SaaS, mobile devices, and more.
  • Companies in a specific geographic location, like New York or Silicon Valley.

Before you attempt to pitch a venture capitalist, you should research whether your company and stage of development align with their focus. It should come as no surprise that venture capitalists receive tons of unsolicited emails and investment opportunities. Most unsolicited emails are ignored. If you want to attract the attention of a venture capitalist, you really need to harness the power of personal relationships and get an introduction through a lawyer, trusted colleague, or another entrepreneur who knows the venture capitalist.

The process of obtaining venture capital is quite time-consuming, so it's important to be patient. It can take several weeks just to get a meeting scheduled, which is typically followed up by more meetings. Then, you will need to do a presentation to all partners, and if all goes well, they will issue and negotiate a term sheet. Finally, both sides' attorneys will draft and negotiate the documents that will show evidence of the investment.

Venture Capital Term Sheet

The term sheet is the initial documentation that is prepared by the venture capital firm and then presented to the entrepreneur. This is an important document as it is the first sign that a venture capital firm is serious and wants to move forward. Before issuing a term sheet, most venture capitalists have already received approval from their investment committee. A term sheet doesn't equal a guarantee that a deal will be finalized, but it is a good sign.

A term sheet will cover the most important aspects of financing, including:

  • Control issues, like the makeup of the Board of Directors.
  • Valuation given to the business.
  • What veto rights the investors will have.
  • Investors' post-closing rights, like the right to access periodic financial information or participate in future financing rounds.

Only some provisions are binding, like confidentiality or exclusivity. While the term sheet is not binding, it is the most important document used when negotiating with investors. It covers nearly all the important topics, while the minor elements will be resolved in the financing documents.

Term sheets are viewed differently by each venture capitalist. Some may be shortened and only discuss the most important aspects of the deal. This allows the parties to focus on the major aspects of the deal and leave everything else to the attorneys when they are negotiating the financing documents. Another option is the long form approach that covers all the issues in the term sheet. This makes the negotiation and drafting of the financial documents faster.

An advantage to the short form is that it leads to a quicker “handshake agreement.” However, the drawback is that it leaves a number of issues unresolved at the financial document stage. If those issues are not resolved, the parties may wind up spending extra legal expenses and wasted time on something that could've been avoided had the long form been used.

Long-form term sheets are typically better for both sides as they can mitigate problems that might arise during the definitive document stage.

Valuation of the Company

The valuation of the business is an important issue for both sides, and is usually referred to as the “pre-money valuation.” The valuation is negotiable, and there isn't one set way to reach the value. A number of factors go into valuation, including:

  • Founders' past success and experience.
  • Current economic climate.
  • Any proprietary technology already developed.
  • Recurring revenue opportunities.
  • Comparable company valuations.
  • Initial traction by the business.

If you need help with venture capital shares, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.