Singapore Startup Business: At an early stage, you may have a product idea or a minimum viable product but are trying very hard to raise minimal funds to do some marketing. At the early stage of growth, most startups would want to look for angel funding and enter into term sheet negotiations with potential investors. This article will highlight 7 key points you need to note when as a startup you negotiate with investors for angel funding.
#1: Pre-Money and Post Money Valuation
The first thing that every Singapore Startup founder will have to discuss with any potential angel investor would be the funding required to be raised, valuation and dilution from the new investor.
Before commencing any funding negotiations, each startup founder should spend time learning about funding dilution for his particular funding round (by comparing with other similar startups in the similar space in the similar geographical location) and ascertain the current market value for your startup idea. Spending time either studying this or finding an appropriate adviser to help you with such pre-money and post-money calculations would be important for your negotiations.
#2: Business Model for Singapore startup business
A business model is how your business will make money. Good ideas are a dime and a dozen but good ideas with a good business model are readily fundable by investors.
Some examples:
For example, lets says for example you have an idea to have a social media sharing idea for food like Burpple. There could be a few business models for this idea:
- First business model: Photo Sharing for Food
- Second business model: Short Video Sharing for Food
- Third business model: Photo/Video Sharing plus ecommerce
The business valuation of the third business model would be the best but hardest from a technical point of view to pull off. Spend time planning your business model and it will pay off in the longer run.
#3: Priced Round or Non-Priced Round
Sometimes when negotiating valuation and pricing with your investor you cannot agree on the valuation or the price per share for the new investment round.
One quick trick in such a situation is to switch from a priced round (i.e. a fixed price per share) (whereby the startup will usually sign a subscription agreement) to a non-priced round (whereby the startup will sign a SAFE Note or a Convertible Loan). In a non-priced round, the startup will offer the investor the right to convert its principal amount into such number of new round shares (at a discount to the price per round of the next funding round of shares).
#4- Board composition
One of the keys of negotiating a term sheet with an investor for your Singapore Startup Business is the board composition. The board of a company controls the operations of the company and if you get this wrong, after a particular funding round the founders may lose control of the company (as the investors would control the majority of the board of directors).
Two quick tips for this:
At the start before external investors come in, the founding shareholders should aim to have more nominees on the board.
After a few funding rounds, the founders should bargain with the investors to increase their number of board nominees so that they remain the majority on the board. As a compromise, the shareholders’ agreement can say that upon the occurrence of certain default events, the investors can request the removal of the founders’ nominees on the board.
#5- What stage of growth are you?
When determining the dilution and your startup’s bargaining position you need to see what stage of growth your startup is in.
Ideation stage- Angel investors may ask to be co-founders of the company and invest at that valuation.
Minimum viable product stage – Investors may ask to see a ready product before investing.
Growth stage – Investors may ask to see user acquisition costs and other metrics before investing money for the startup to grow its user base.
#6- Team Composition in a Singapore Startup Business
When speaking to investors, the startup founders should figure out what is their unique selling proposition. Not all tech companies require a technical CTO today as there is a no code movement. If the key of the startup is business model innovation, then the startup requires a good founder who is able to show that he has the necessary background to run a tech startup.
If a startup is a clone of a successful model in another large country whether the US, India or China then you may be able to find a successful tech clone overseas to buy off the shelf.
#7- Founders’ Equity for Singapore Startup Business
Finally, unlike the private equity world, VCs tend to believe that if the founder has too little of equity in the company, they will not work hard to persevere in the longer term. So founders tend to have some leverage when speaking to investors.
The investors would want to study the equity split amongst the founders so that is another point of contention. Like we said above, whilst it is easy for founders to split equity evenly that may not be the best for the longer term. Do spend some time discussing and planning the founder pool equity split.
In conclusion, as a Singapore Startup Business whilst fund raising is the lifeblood of a startup, negotiating a good deal is also key to getting a good valuation for the founders. Spending time looking at these 7 key legal issues is something every startup founder should focus on to ensure a good favourable outcome at the end.
If you have any comments on our article, please leave a comment below.
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