Common pitfalls while raising venture capital
Posted on Monday, May 23rd, 2016 at 7:06 pm
Venture capital is a powerful tool for a startup hoping to expand, providing the leg-up to even climb onto the growth ladder. It is a complex process, however, governed by SEC rules and lined with pitfalls that can rob founders in the long run. It is imperative that you seek experienced legal guidance through each step of the process of raising capital.
Here are just a few of the common issues that cause startups to make critical errors in the venture capital stage:
Reaching out to investors – The SEC has established strict rules against advertising or soliciting venture capital. Do not publicize, advertise or put content on your website about seeking capital. You should not reach out over social media, unless there has a pre existing relationship has been established. A lawyer can help you seek out qualified capital.
SEC Rule 506 – You cannot sell securities to non accredited investors. Your investors must pass certain checks and criteria, which an attorney can help you understand. This protects the startup from a myriad of compliance and regulatory issues.
Work through a registered broker – There are a wide range of variables that can make a finder unqualified to broker the deal, including certain types of commissions and compensation.
Due diligence – It is critical that you thoroughly investigate any potential investors, doing your homework and determine motivation, net worth, end-game and other dynamics that could adversely affect the relationship you are about to establish with your investor.
Issuing equity – It is not always in the startup’s best interest to issue preferred stock, unless the firm is raising a significant amount of capital. Seek guidance regarding options for other types of equity or value that you can issue that will protect you from dilution later.
Raising capital is an incredibly complex process with countless opportunities for mistakes. Seek out prudent guidance and wisdom from a firm that has led other companies successfully through the VC process. Slater Pugh, Ltd. LLP serves startups throughout Austin, Texas and has the experience to protect your firm from devastating errors while raising capital.