SG Startup Business: The economics of negotiating a deal with venture capital investors is always different when negotiating with angel investors. At the venture capital funding stage, the VC investors would want to see traction with users and a minimum viable product. Some VCs will tag investment into several stages depending on whether the start is able to hit its internal metrics targets.
#1: Business Model – SG Startup Business
A startup always starts with one business model, but may pivot over time to reach its addressable market in different ways. One of the key terms that a startup needs to determine is the business model of the startup and the description of the business in the startup.
One tip to note when drafting the description of the startup in a term sheet/investment agreement is to describe the business a bit more generally in the early stages.
#2: Amount you need to raise/ Valuation and post-money dilution
One of the first things that a startup needs to do is to prepare a budget for funding to determine how much money is necessary for its operations and determine the valuation of the company. The relative valuation of the company depends on the business model of the company and the addressable market size that the startup is focused on.
A startup founder at this stage of fund raising should spend time looking at relative valuations of comparable startups to back your valuation estimation. If necessary, you can speak to a financial adviser that is familiar with valuation for startup fund raising.
#3: Requirement for vesting for founders
Most VC firms will insist on vesting for founders if there are more than one founders in the founding team. This is a provision that states that if one founder leaves before a certain period, the shares will be acquired by the Company or transferred to the other founders for a nominal consideration.
The purpose of this vesting schedule is to ensure that all founders stay on for the agreed duration and if any of them leave early the remaining founders do not feel that one of the founders got a free ride (by retaining most of their equity) even after they left the startup (especially early in the life of the startup).
#4: Rights of preference shares
Some rights of preference shares are set out below:
Preferred Dividends
Most startups in Singapore have preference shares which may have preferred dividends but such dividends are only payable when dividends are declared.
If your investor wishes to have preference shares that pays out actual preferred dividends, such preference shares are usually for private equity deals especially relating to property or such assets which have consistent cash flow. Thus as a startup, if you are offered such preference share terms, this would be unusual.
Voting Rights
Most of such VCs preference shares will have voting rights so this would be typical.
Liquidation Preference
Most preference shares by VCs have liquidation preference over ordinary shareholders. Each subsequent class of VC shares will have liquidation preference over the previous class of preference shares.
#5: Board representation
Founders should spend some time thinking about board representation which will be stated in the term sheet and shareholders’ agreement. Founders should try to plan early to have more board representation as each lead VC investor in each funding round will get to appoint one director to the board.
#6: What investment instrument to use in your SG Startup Business
If the startup can agree on the price per share for a funding round with the VC investor you can sign a subscription agreement and shareholders’ agreement.
If the startup cannot agree on the valuation/price per share of the company with the VC investor, the startup can sign the SAFE Note, KISS Note or CARE Instrument.
If the VC investor thinks that a particular investment is higher risk, he may invest via a convertible bond.
#7: Multi stage investments in SG Startup Business
Some VCs like a product/startup but cannot determine whether your startup as attained traction. The sensible thing then is to take their money but offer to tranche the investment. So the investor can invest in 2 tranches at the same valuation for each tranche and you the startup gets at least half of the funds upfront.
In conclusion, a SG Startup Business needs all the cash it can get to get off the ground. Spending some thinking very hard about the key terms for your fund raising exercise is important to ensure that your startup gets a good deal.
If you have any comments on our article, please leave a comment below.
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