Guides • 30 March 2021
You’re an early-stage startup who’s ready for your first institutional fundraise – what do you need to prepare or take note of to ensure optimal success? We heard from Lee Jin Rui, Partner at Rajah & Tann Asia, for tips.
Startup founders who have made it past the first hurdle of bringing their idea to life – and to the market – have much to be proud of. If you’re leading an early-stage startup, you’d know that more work lies ahead of you to reach hyper-growth. At this point, you might have questions around what it might take to seek and bring your mission to your first institutional investor.
We recently co-hosted an insight-packed session to help founders navigate their fundraising journey with Lee Jin Rui, Partner at Rajah & Tann Asia’s Mergers & Acquisitions and Venture Capital Practice. The session included tips on how founders can identify the most strategic institutional investors, how to prepare for their first institutional fundraise, and what to expect to set themselves up for fundraising success.
Missed the webinar? Check out the replay or read a summary below.
Parts of the presentation have been summarised and edited for brevity; other parts have been timestamped to hone in on your topic of interest.
Pre-fundraising Preparation [21:11]
Prior to the first institutional fundraising round, the first thing that investors will be interested in understanding is the maintenance of a company’s capitalisation (or “cap”) table. This should be maintained and updated every time founders receive new funding.
A cap table presents who the company’s shareholders and investors are and what investment instrument they hold. It will also show the fully diluted or converted shareholding of the company – allowing them to understand what percentage of ownership each shareholder would have.
This is important to investors, as all parties would use this to compute and derive valuations, how many shares of the company an investor would own based on their incoming investment, how the cap table will be affected, and how much of the founders’ shareholdings will be diluted by.
Corporate Records & Material Contracts
These are documents handled by a corporate secretary like Director Resolutions, AGM minutes, various registers of transfers and allotments, etc. It would be best to have these documents ready, organised and easily accessible before investor due diligence starts, eliminating last-minute requests that might hinder the process.
Founders may or may not have had a founders’ agreement prior to their fundraise but, in any case, this would very likely be superseded by the shareholders’ agreement that the investor (and all other shareholders) will be signing with the company.
While there are founders that may think it is not necessary to enter into employment agreements because they may be the only shareholder or director of the company, there is a distinction from a legal perspective. For early stage companies, Jin Rui recommends that it may not make sense to seek legal assistance to draft an employment agreement as there are templates online that founders can make use of – the important thing is to have an agreement that sets up key employment terms such as salary, notice period, etc.
Ownership of Assets / Intellectual Property (IP)
For companies where founders have created IP such as an app, programme, platform or website, it is important to distinguish where ownership of the IP lies — the company or founder — as they are technically separate entities from a legal perspective.
Structuring of Group
Depending on the jurisdiction that the company operates in, there may be reasons for founders to consider having various subsidiaries. This may not be feasible due to cost concerns for early stage startups but is something that founders might want to keep in mind in future, if relevant.
Another point to note — founders may notice that having a lot of shareholders (like friends and family or angel investors) on their cap table may actually hinder future fundraising. In some cases, founders may create a separate vehicle to house these early investors, applying certain governance structures in order for these investors to exercise their rights over those shares.
All these are not factors that founders have to complete before they commence fundraising and, in all likelihood, there may be issues uncovered by investors when they are doing their due diligence on a company.
Stages of a fundraising transaction [31:09]
Getting your first term sheet [32:21]
To engage a lawyer or not?
The answer is: “It really depends”! The main consideration here would be cost. It may be possible to draft a term sheet without the help of a lawyer, though a lawyer would be able to provide a high-level review to comment on any concerns within the term sheet. Unless founders have specific concerns around the fundraise or company operations, crafting a term sheet themselves or seeking a high-level review by a good lawyer is typical for founders at this stage of fundraising.
To reduce costs and negotiation friction during the fundraising process, the Singapore Venture Capital Association (SVCA) and Singapore Academy of Law (SAL) have crafted the Venture Capital Investment Model Agreements (VIMA).
While each investment may be unique, VIMA offers founders a set of model agreements for use in seed and early stage financing. These documents have been derived after consultation with founders, investors, and law firms in Singapore, and reflect common clauses considering founders’ and investors’ interests. They include a term sheet, subscription agreement, shareholders agreement and more.
Founders are able to download and view the VIMA documents to kick-start investment discussions, or compare an investor’s term sheet against the VIMA template. The idea is to help founders save time and legal costs with a document representing about 70 to 80% of a standard term sheet, with the rest being a process of negotiation of the key concerns or rights investors and founders may want to discuss.
Note: these agreements are only applicable in the context of companies and investors operating and investing in Singapore.
Due Diligence and NDAs
Concurrent with or after signing a term sheet, investors will carry out their legal due diligence on a company, for which external lawyers will be engaged to request for documents from the fundraising company. Unless there are very strong reasons to, it is uncommon for VCs or institutional investors to sign NDAs at this stage.
Term Sheet: Commercial Terms [39:45]
Term Sheet: Legal Terms [40:23]
- Binding / non-binding
- Warranties – joint and several by Founders
KEY VC TERMS - Governance [45:18]
- Board seat / observer rights
- Information rights
- Reserved matters / Veto rights
KEY VC TERMS – Preferential rights [49:38]
KEY VC TERMS – Exit rights [55:21]
- Founder lock up / moratorium
- Pre-emption rights
- Tag along
- Drag along
- Other exit rights
Fundraising transaction documents [1:00:58]
- Term Sheet
- Share Subscription Agreement
- Shareholders Agreement
- VIMA Documents
- How much bargaining power do companies have in negotiating the terms in a term sheet? [1:02:51]
- What are some of the biggest pitfalls that startups make on the legal front both at an early stage or later on? [1:04:55]
- How do I know which terms in a term sheet are common? [1:08:45]
- Is VIMA a standard across VCs in Southeast Asia? [1:11:33]
- How do you calculate startup valuation for investor pitching purposes? [1:14:32]
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This article and the linked webinar (collectively, the "Information") are intended for general informational purposes only. They are not, and should not be construed as, any form of financial, investment, tax, or other professional advice provided by Fundnel Pte. Ltd. ("Fundnel") to any person who is directed to or otherwise accesses the Information, including yourself. You are responsible for seeking professional advice before making any investment decision. Fundnel is not responsible for any loss you may sustain in relying on the Information.