Startup : 3 corporate law tips when negotiating funding term sheets

Startup : Fund raising is the life blood of startup business ventures in Singapore.  In this article, we will highlight for you 3 common legal points that you need to pay close attention to when negotiating term sheets with angel/seed/VC investors.

#1: Dilution and Pre-Money and Post Money Valuation

The most important thing that all startups will negotiate is the pre-money valuation, the post-money valuation, the amount to be raised and the maximum potential dilution.  All four concepts if you are new are separate articles in themselves but we will try to explain the concepts one by one.

Pre-Money Valuation is what the startup deems to be its pre-funding valuation.  The higher the premoney valuation that the startup can negotiate, the lower will be your post-funding shareholding dilution.  How will you determine what is the pre-money valuation for your startup?  If your start is still at the ideation stage then its valuation will be lower, if your have a mobile app or website already in place then its valuation will be higher.

Post-money valuation = pre-money valuation + amount raised

investor’s post-investment shareholding	=	Investment amount	X	Share capital
		post-money valuation

#2: Post-Investment Board Composition of the startup

Startup: As a startup founder you should always aim to have a majority of the board when planning your board composition.  One of the startup founders actually spent some time thinking about how many funding rounds that they will have in the future and then noting that each founding round would add 1 or 2 director representatives of the venture capital investors, they managed to have a majority of the board by appointing more directors at the onset (before the other investors came in).  This is an important point and you should spend some time as a founder thinking of this.

#3: Liquidation Preference for preference shares for Venture Capital investors

An investor invests into a startup for preference shares.  A normal feature of such preference shares is to have at least one form of preference, which is liquidation preference.  There are several types of liquidation preference for preference shares

Participating preference shares : This mean that on an exit event (for example a trade sale), it allows the VC investors to earn both their principal back and profit share from an exit event.

Non-Participating preference shares : This mean that on an exit event (for example a trade sale), it allows the VC investors to earn both their principal back but no profit share from an exit event.  In such a situation, VC investors may ask for interest to accrue on the principal amount extended to the startup to increase their returns on their investment.

In conclusion, these are the three key legal terms as a startup founder, you would need to negotiate with the investor.  Plan early and discuss internally amongst your founding team so that when you meet potential investors you will a consistent approach.  The journey to a large startup is tough and we wish you all the best in your startup growth.

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