Lawyer Yingyu Wang shared practical tips about fund raising for start-ups during a Facebook Live Q&A with AsiaLawNetwork and partners e27, Startupbootcamp Fintech Singapore and General Assembly.
Ying is an active litigator who advises clients on transactional and corporate work regularly. She is the only female named by The Legal 500 AP as a leading individual for Technology, Media & Telecommunications (TMT) Law and recommended for Intellectual Property (IP) Law in 2016 and 2017, and is named one of the 40 brightest legal minds under 40 in Asia by Asian Legal Business.
What background work should founders do before fund raising?
First, you need to have a clear vision and business plan about what you want to achieve and how to put your ideas into a proper execution plan. Some of the questions you should reflect on include:
- Do I know the market share I need to conquer?
- Do I know how much money I need?
- Who should be in my key management team?
- Have I spoken to my potential clients to get them to buy in to the company?
Second, you should establish a common understanding on issues such as the co-founders’ respective contributions, expectations and obligations before fund-raising. I recommend that co-founders form a contract setting out the expectations and obligations of all parties.
Third, you should also prepare an investor deck. The main thing investors are interested in is the execution of the idea. An investor deck will allow you to communicate the business plan you have.
What are the factors start-ups should consider when trying to raise funds?
You should first ask yourself whether the funds are a ‘need’ or a ‘want’ as this will affect your bargaining position. If the funds are a ‘want’, you should determine a clear and achievable target to work towards using funding. In deciding on this goal, you need to factor in your burn rate and your operating costs. You should always keep in mind how to keep your operations lean.
If it is a ‘need’, you will need to calibrate your business plan more carefully.
Investors do consider factors, such as the financial contributions of founders into their start-ups, whether they have registered for a patent which belongs to them personally, as well as the opportunity cost on the founders having left their previous job to pursue this start-up endeavour. Highlighting these factors may improve your bargaining power.
Next, you should decide on the type of investors you want and the number of rounds of investment you plan to go for, at least for the next three years. As a rule of thumb, by the time you reach Series A, you should still retain a special majority. Make sure that you plan accordingly when raising funds.
What are the pros and cons of staggering many rounds of investments?
If you stagger several smaller rounds of investment prior to Series A, the amount you have to raise for each round is lower, which will be less taxing on you.
Another benefit of staggering your rounds is that it may put you in a better financial position in the short run to negotiate for a higher valuation in subsequent rounds.
The disadvantage of having many rounds is that the overall process might be more tiring. However, this may be mitigated by having more investors from earlier rounds committed to funding your start-up and they can provide recommendations and assistance in subsequent rounds.
What are the key things startup founders should consider in order to ensure that they remain in control after raising funds?
On the shareholder level, you should make sure that you have the requisite voting rights needed to pass shareholder resolutions. You should also consider to what extent will you be diluting your own shareholding.
On the management level, you need to consider if you will still have control if you are giving up a seat at the Board of Directors to an investor. In Singapore, it is possible to be the sole director of a company. If you are giving a director position to an investor, make sure that there won’t be a deadlock in decision making (e.g., two directors who can oppose each other’s decisions). You can include another director to prevent any potential deadlock.
Should lawyers negotiate on behalf of startups?
I recommend that lawyers work behind the scenes for startups. There are two reasons for this arrangement.
It is cheaper to get lawyers to work behind the scenes. There will be higher costs if lawyers are involved in negotiations. Second, having a lawyer might affect the relationship between the investors and the startup founders.
You should get your lawyer to highlight the important issues you should look out for in the negotiation. When negotiating, you don’t need to agree to all terms immediately. It is good to be calm and collected. You can bring the terms back and consult your lawyer again.
Can start-up founders solicit for funds publicly?
There is no law against public solicitation for funds (subject to certain MAS regulations such as public listings and crowdfunding).
But investors are not just about the money. They can help move your startup forward. If you have a credible pool of investors in your first round, you can leverage on this in your next round of fundraising. I have seen investors who are willing to pay a premium in subsequent rounds of financing because of investor credibility from the first round.
Investors can also help you approach your potential customer base and open up opportunities for further business development.
When should start-ups find lawyers for advice about term sheets?
My advice to startups is that they should see a lawyer early because it is good planning. To find a lawyer only when you are in desperate need is generally not a good idea.
If you foresee yourself going for multiple rounds of fund raising, you should think about the term sheet in advance. Getting a legal consultation at an earlier stage before you approach any investors will allow you to have a clearer picture in mind and know which are the onerous terms to look out for.
Seeking legal advice early and identifying the exact financial arrangements you are looking for will not only put you in a stronger negotiating position, not beholden to terms which other people set. It will also increase investor confidence in you and help you better identify investors whose terms are more favourable to you in the long run.
If you agree to complicated term sheet agreements in the first round (e.g. preference shares or reverse vesting arrangements), this can potentially affect investor confidence in the subsequent rounds, and there may be higher legal costs incurred when disputing complicated term sheet agreements.
You also want to get legal advice early. If you seek out a lawyer’s advice after you get a term sheet, it might already be too late for the lawyer to add significant value.
Are audited books a typical requirement for fund raising?
Most small firms are excluded from auditing so this is not a typical requirement. But investors may still ask for audited books to see the financial state of the company.
You should get an external auditor or accountant to do your books. Not only can they settle your day-to-day bookkeeping but they can also advise you on how to recognise your assets.
You are advised to get an accountant to help you from the start. This is the same principle as getting legal services.
What are preference shares and convertible notes?
Preference shares grants the investor priority for payment in cases of insolvency. There are however various types of preference shares. For example: redeemable, non-redeemable, convertible and non-convertible. It is unnecessarily complicated at pre-A structure to issue preference shares in general. Preference shares may be preferable if you do not want certain investors to be involved in the management of your start-up.
A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round. If you don’t want to dilute your shares, convertible notes are a useful tool.
How should founders think about structuring their company?
Between or among co-founders, a co-founder agreement can be used to structure the obligations and expectations across all parties.
For your employees, you can consider an Employee Stock Option Plan (ESOP). An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares.
If you are giving market rate salary to an employee, you don’t usually need to consider ESOP. But if you are looking at someone who is taking a pay cut to join you, you should consider ESOP. In doing so, you need to consider where these shares are coming from and coordinate this arrangement with other shareholders.
What kind of legal budget should I earmark for structuring work? When is it too much or too little?
If the work is concerning a straightforward shareholder agreement based on the Model Constitution, it will cost around S$2,500-S$5,000 (US$ 1,735-U$3,470).
If you want to reduce your legal cost and do not require a complex company structure, you can choose to adopt the Model Constitution. The Model Constitution generally treats all shareholders fairly. I have worked with clients who come up with more complex shareholder agreements and structures which amounted to around S$10,000 (US$6,950) and up in legal costs.
Tell us more about Intellectual Property (IP) rights and Patents
There are generally five categories relating to IP rights.
- Confidential Information
- Registered Designs
Startups should be thinking about IP protection from the start. If you are a hard-tech company, your IP rights will affect the worth and valuation of your company, hence it is very important to protect your IP. Even if you are a social-media type of company, your software can be protected by IP, and this may affect the intrinsic marketing value of your software.
Only novel inventions can be protected by a patent. If you have such a product or technology, you should find a good patent agent to file your patent application, as he will be able to better advise you on the likelihood of the patent application being granted.
Source codes may be protectable by copyright. However, it may not afford sufficient protection as your ideas and the intended effect may be copied without using the same source code.
When should I be releasing sensitive information about my company and its products?
If you have a particularly innovative product, you should take steps to protect your IP. You can protect your IP by getting other parties to sign a Non-Disclosure Agreement (NDA) before you disclose any sensitive information. While most funds usually won’t sign a NDA, personal investors are usually more open to signing a NDA. If an investor is not willing to sign an NDA, it may be better not to take the risk of disclosure and let the investor go.
If you are collaborating with other companies, you can protect yourself via licensing agreements. These are usually tailored to the product of the company and are more complicated documents.
If you are commissioning someone to develop your code for you, the developer’s agreement between both parties must be well-drafted. You should specify that the rights and ownership of the code must fall back to the company.
As far as possible, discuss your invention with only a small group of people in a professional setting, including lawyers, patent agents and a group of professionals. Do not disclose it publicly as this may affect the novelty of your invention, which may affect its patentability.
To enforce your rights over confidential information, you have to sue someone else in Court and prove that the information is confidential in the first place. This may be costly. Hence, it is advisable to seek other forms of protection such as through a contract. For the other categories of IP rights, you should try to protect yourself contractually.
If your IP rights are integral and essential to your company, it is advisable to seek legal advice on registering for IP protection and drafting the necessary agreements.
Do you have any advice for trying to get out of a bad VC arrangement?
You should consider if the arrangement is void or voidable based on various grounds.
It is recommended to get legal advice for your specific legal scenario. A lawyer will be able to best advise you after examining the contract and other various agreements.
What should founders know about exits?
You need to have the end in mind. Here are some (non-exhaustive) methods of exiting:
The first is getting listed. To get listed, your company must at least fulfil the following general elements:
- Company must be profitable,
- Company’s accounts must be in order,
- Company must have paid taxes in accordance to the requirements.
Another means of exiting is a trade sale. When considering a trade sale, you should be aware of the price and timing at which you will sell your company.
Ying is one of the two co-founders/shareholders of Via Law Corporation. Ying helps clients seek alternate means of revenue away from traditional streams by monetising their intellectual property rights.
Need legal advice about fund raising?
Yingyu and other lawyers like her are now available to advise start-ups on their legal matters through a Quick Consult. Get a call back from Yingyu or another lawyer of your choice within 1-2 days for a transparent, flat fee starting at S$49 (US$34). Get started HERE.
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