Before approaching potential investors, get these items out of them way to minimize the number of potential investors you have to approach.
Venture Capital. The term Venture Capital gets thrown around a lot these days. It’s a buzz word that could get you suckered into a lot of trouble if you don’t actually know what it means. Contrary to popular opinion, Venture Capital isn’t some rich guy opening up his wallet to you right at the drop of a hat. Investors instead deposit money into VC Funds that then gets dispersed in smaller or larger chunks to multiple start-ups. The Investors that add to the VC Fund must see that you have some kind of Exit Strategy or way for them to get their money back within a few years. To pry VC Funds from the money they hold, not only is it a good idea to have a good idea, but it’s wise to make it look as brilliant, unique and profitible as possible.
Abstract. An abstract is typically six to eight lines long and does for describing the business what it sounds like it would do. It outlines the basic, abstract reason that the start-up should exist and might even project about future directions.
Executive Summary. According to Oregonstate.edu, an executive summary is a report, proposal, or portfolio, etc in miniature (usually one page or shorter). … Usually, it contains a statement of the problem, some background information, a description of any alternatives, and the major conclusions. Someone reading an executive summary should (not become) bogged down with details.
Term Sheet. This rather short and readable Term Sheet simply lays out the Terms without the use of legal jargon, terminology and lingo. The money from the VC Fund is borrowed with certain Terms put in writing prior to any Contract. It tells the amount of money to invest, numbers of shares, valuation, liquidation preferences and dividends. Until you prepare it, it’s full of things you probably didn’t think about but those same things are what make the World go around for Investors. Want their money for your start-up? Then sing their song and speak their language!
Your Term Sheet will also briefly touch on who’s involved, the Board of Directors and what will change or be the target of future rounds of applying for Venture Capital. If you don’t have a Board of Directors all laid out and pretty, say so! If there’s something you don’t know, say, “we don’t know that yet!” Investors will not be glitzed into giving money to you. They want numbers and they want honesty.
Common Stock Payout. Aren’t you a daisy? All that hardwork and you have to pay back the capital that got you started. There’s good news about the typically schedule for Common Stock Payout. Owners get twice what the Investors get. If there’s $75M to give away, the Investors get $25M typically. One day, maybe you can be an investor and get paid for helping other people’s ideas off the ground.
Liquidation. Bad news. Venture Capitalists get preference. If you owe $90,000 to a VC Fund that loaned money to you, all the equipment you use and everything you can sell must be sold since it contributes to the value of that business. Before you pocket a penny, the VC must be paid back. The big grab-your-ankles-OUCH comes from when you owe 2x or 3x what was borrowed!
Think carefully before committing your daydream to a debt.