If you are in the process of fundraising for your startup, it is likely you will have asked yourself the following questions:
But is paying USD 500 an hour (Chambers and Partners) the only way to get these questions addressed by experts?
In Dragon Law’s last Legal Startup Academy, we sat an entrepreneur and investor down with two legal practitioners. Here are your questions on early stage funding, answered:
Tom: I have raised seed rounds from angel investors as Founder of Bakipa and Grow360. They were experienced investors (rather than friends and family) for the most part. Not only were these investors interested in the field we were operating in, they were also of great help towards connecting us to other investors. The startups I work with at Leo Tech now are looking to raise larger rounds for Series A. They speak with venture capitalists (VCs) who are focused on businesses with better traction.
Sarah: Where founders don’t have the resources to bootstrap or get investment from family and friends, crowdfunding is growing as an alternative. The Monetary Authority of Singapore (MAS) recently granted a Capital Markets Services Licence to a crowdfunding platform for the first time. Crowdfunding or pre-market sales sites can also be a useful way to test market interest in your product prior to launch. Be very careful, however, that you are using a reliable platform that is working in line with regulations.
My startup clients in New Zealand were developing high-tech products in the healthcare sector that required lengthy research and development time. They looked to VC funds that had a mixture of government and private backing, where the investors were prepared for a long lead time before they would see a return on their investment.
Elaine: Agreed. The usual avenues are: Family and friends, venture capitalists and angel investors.
Elaine: Startups in Singapore should take full advantage of government support that is available to them. You can learn more about the eligibility criteria, requirements and considerations at Infocomm Investments and SPRING Singapore (ACE Startups Grant).
Tom: It is difficult to provide an absolute answer to this. My advice is for you to test as many assumptions as possible before beginning to raise funds. You can begin by selling an early version of the product and through this gather feedback from as many potential customers as possible; or evaluate other startups who are trying to solve a similar problem. Beyond this, you will most likely need a minimum viable product and some traction in order to raise from angel investors.
Having a solid core team in place will also help boost investor confidence. A track record of having worked together for considerable time is a huge plus – too many startups fail as a result of founders falling out.
Minimise the impact of founder conflict with a Shareholders’ Agreement:
Elaine: You are ready to start fundraising when you have a pragmatic business plan that poises your startup to take off on an accelerated growth path. Be prepared to give up a part of your equity in exchange for a high valuation – this prevents a huge dilution of your own stake. This possible loss of control/decision-making power calls for a certain level of mental preparedness before you begin your search for funding.
Tom: Many founders get overly-focused on valuation at early stages. This can result in negative repercussions in some cases. An experienced and reputable investor will generally be able to provide good insight into what a fair valuation is. It is also important for you to understand all terminology in investment documents to ensure future scenarios are aligned with your expectations (e.g. liquidation preferences).
You should also know what your walk-away point is i.e. how much equity are you willing to give away in the investment round? Have this clear in your mind before you engage in serious talks. Finally, if you are lucky enough to be in a position to do so, it is always good to talk to as many investors as practical in order to get a better sense of how your business is perceived. In an ideal scenario, you’d want to have more than one offer of investment.
Sarah: There is a saying that a “win-win” happens when both parties are equally unhappy: Accept that consensus will take time and don’t allow yourself to be railroaded. Negotiate in a mature manner so the investor will respect you as a business partner going forward.
For an investor, often taking advantage and requiring unconscionable terms can backfire. A founder may begin to resent the situation and the development of their idea can falter, leaving you with favourable terms but no value in the business to see any benefit from those terms.
Elaine: The bottom-line is for both investors and founders to be absolutely clear on what they want.
Tom: Bluntly speaking, if you expect a high salary, perhaps a startup isn’t the right place for you. You should consider yourself lucky if you achieve break-even in the early years of a startup. To me, this is more about personal runway and will undoubtedly depend on individual cost of living.
In cases where it is not possible to get a salary that fully covers your cost of living, founders need to calculate how much personal runway they have until it is no longer viable. This runway should allow time for the business to get to a point where it can sustain a higher salary or for other options to be worked out.
As much as possible, any additional funds should be re-invested toward product or business development.
Sarah: Investors will usually want (and should) incentivise founders to stay on to build the business, especially in a startup’s early stages. It is important for both parties to find the right balance between what is essential to live in a city like Singapore; yet at the same time is sensible for the business. The best way for you to achieve this is to back your salary requests by well-researched numbers that address the cost of living in Singapore.
The above is the transcript of a panel discussion that took place at one of Dragon Law’s Legal Startup Academy sessions.
About the Dragon Law Legal Startup Academy
The Dragon Law Legal Startup Academy is a 6-module series aimed at empowering business owners in Singapore with essential legal knowledge for every stage of the business. View our full Academy listing here.
About the Panelists
Tom Duncan has recently joined Leo Tech as Head of Investment Operations. Leo Tech is a technology company based in Singapore that provides technology consulting and development services for corporates and has an investments team focused on startups. Tom is an active early stage investor and has co-founded two startups – Bakipa and Grow360. Prior to this Tom spent more than a decade in Investment Banking, including most recently at Barclays in Singapore focused on capital markets. He holds an Executive MBA from INSEAD.
Sarah Hales is Sales Manager at Dragon Law in Singapore. Sarah started her career as a Commercial Lawyer in New Zealand, before moving to Australia to manage a team of Estate Planning lawyers at NAB. She now enjoys working with a wide range of startups and SMEs, allowing them to access legal documents cost-effectively and increase efficiency in how they manage legal matters within their business.
Elaine Beh is a Partner at Virtus Law LLP, part of the Stephenson Harwood (Singapore) Alliance. She has substantial experience advising small and medium enterprises in their corporate and fundraising transactions. Clients value Elaine’s “hands-on” approach to matters.
About Dragon Law
Dragon Law’s technology helps companies in Singapore and Hong Kong build legal documents they need at every stage of the business. Its interactive platform allows users to create, customise and store legal documents in the cloud for sharing and signing online. Our free trial lets you to create up to two legal documents tailored to your business – start by registering here.
About Stephenson Harwood (Singapore) Alliance
The Stephenson Harwood (Singapore) Alliance offers clients an integrated service in multi-jurisdictional matters involving permitted areas of Singapore law and is widely recognised as being a top-tier firm in asset finance, shipping and international trade, corporate, covering the Southeast Asia from its Singapore hub.
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