4 Steps to Preparing for Venture Capital Fundraising
4 Ways to Get Ready for Venture Capital Fundraising
We’ve worked with enough clients to know that a tremendous amount of energy goes into getting your business to a point where it’s ready for venture capital fundraising. However, you need to put your best foot forward now that you have their attention. In addition to refining your pitch, here are four steps that we’ve identified as essential to preparing to court investors for your business.
1. Get Your Capitalization Table Ready
The first item on your agenda when preparing for investors is to straighten up your capitalization table. Also known as a cap table for short, this ledger tracks ownership in the company. Usually, this is among the first things that interested investors will want to see during due diligence. The information within needs to be easily understood and up to date. Make sure that it includes, at a minimum:
- The company’s equity structure
- An explanation of common and preferred stock options
- All current investors in the business
- The percentage owned by the founders and employees, respectively
- Details relating to the employee option pool
2. Perform Pro Forma Projections
Once you’ve revised and updated your cap table, then it’s time to start running Pro-forma (matter of course) projections. While your cap table shows interested investors where your business is now, Pro-forma projections demonstrate your business’s potential moving forward. Don’t try to make your numbers look better than they really are. Any investor worth engaging with can tell the difference between a solid venture and one that’s too good to be true. Typically, they’ll want to see your projections for 2-5 years into the future so that they can better gauge your business’s viability and capacity for growth.
3. Go Through 409a Valuation
A 409a valuation is a third-party assessment of the fair market value of a private business’s common stock. While the value of publicly traded companies can be found at the nearest available stock ticker, figuring out the worth of private companies requires significantly more work. Doing so involves looking at both tangible and intangible assets, as well as expected future profits. You’ll also want to factor for control premiums and your business’s marketability. Some companies even offer discounts when they know that they’re harder to market than the competition. Finally, the above criteria will be compared against businesses in the same industry as your own for an accurate picture of its overall viability. It’s worth noting that you will need a new 409a valuation whenever you want to offer new grant options to your employees.
4. Educate Your Employees on Employee Stock Options
Next, consider employee stock options (EOS), which allow you to compensate your employees with ownership in the company in addition to their regular salary. Businesses often benefit from granting employee stock options before seeking investors. Otherwise, you might end up paying out more than you offered in your initial offer letter. This is because their exercise prices increase if your business’s valuation does, too. Your employees might also appreciate a reminder that they can take advantage of their options while you’re still courting investors so that they can enjoy possible tax benefits.
Looking for help getting your business organized and refining your pitch before meeting with potential investors? Contact us by calling (727) 279-5037 or visit our consultation page today.