Funding becomes the inevitable step for entrepreneurs to explore untapped opportunities. Besides, registering a startup business and going through various regulatory compliances, getting a startup funded is an important aspect that needs significant time and effort. More often, entrepreneurs start looking for raising funds once they decide to propel their business to the next level. And, they go through various processes before they hit ‘eureka moments’. Below is the startup funding process which is common to most of them.
Screening: Once the pitch deck is shared, it goes through the screening process where prospective investors review it and see if the startup is ready for investment. They evaluate the business ideas, product prototype, potential market size, etc. Then they conduct a small meeting (over Skype, call or in person) to validate and get additional information if required.
Basic Due Diligence: Going to the next step, the investor conducts the basic due diligence process in which other investors further evaluate the startup.
Pitching session: This is where you get started. Investors call you for a pitching session where they ask as many questions unless you satisfy them with your answer. One should be ready to face rejection if an individual investor or institutional investors, angel networks or VCs don’t get fully convinced.
Term Sheet signup: If you have convinced them enough then you will get a term sheet. The document enlists all the terms of investment, which you mutually negotiate and agree upon during the pitching session.
Depending on several factors such as investment instrument (equity, debt or a mix of both), stage of your business and structure of the investor (individual or institutional), the Term sheet may vary. It’s usually non-binding and has an expiry date of 60 to 90 days to close the transaction.
Detailed Due Diligence: After Termsheet signup, investors conduct the financial and legal due diligence. Depending upon the age and stage of your startup, type of investor, it might typically take 4 to 8 weeks including workplace verification.
Shareholders Agreement: SHA is an agreement entered into between all or some of the shareholders of a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It has only one purpose – protecting incoming shareholder’s rights.
Upon due diligence completion, this document is signed between investors and founders. It covers a range of aspects to protect all the shareholders from the likelihood of any potential disputes arising in future.
Transaction: After Shareholders Agreement, you get the funding from the investor either in one shot or in tranches (it is completely based on your negotiation with the investor).
Round Closure: This is the last process that an entrepreneur has to follow to avoid any penalties from the government authorities. Yes, post-transaction, an entrepreneur needs to do the necessary filings at the registrar of companies (RoC) in India (or its equivalents elsewhere) before you can call it a closure.
(See more: Startup Jargon Words for Entrepreneurs)