How does a financing round work with venture capital financing?

Our society needs start-ups that drive innovation. However, young business founders often simply lack the necessary capital to start a business from scratch. The result is: Innovative and new business ideas cannot be implemented. When family and friends don’t qualify for funding, a venture capital injection is often the answer last chanceto implement your own business idea after all. But how does venture capital financing actually work? And what about the often complex contracts for financing by investors? We answer these and other questions on the subject in the following article.

If start-ups have opted for financing with venture capital, this means that they must be willing to enter into a counter-deal: while the investor provides equity capital for the start-up, in return he receives a direct stake in the company as a shareholder. But before the deal is done and the financing can really get started, certain things have to be done basic steps undergo a financing round. These are:

  • Addressing investors (pitch)
  • Negotiation of the economic cornerstones (term sheet)
  • Due diligence by the investor
  • Negotiation and conclusion of the participation agreement

Attract investors with a perfect pitch

The first step is to find an investor who is willing to invest in your own start-up. To do this, they must first be convinced of the business idea and the founding team. Here is now sales talent asked. After all, it doesn’t make sense to simply read the business plan out loud and then wordlessly put it on the table with the investors. Rather, the aim of a pitch is to present the business model briefly and concisely, so that the investors are enthusiastic about the idea and agree to financing. There should also be no lack of specialist knowledge if you want to close the big venture capital deal. Because if the venture capitalist digs deeper into individual points, this can lead to unpleasant situations. During the conversation, all questions should be able to be answered completely and professionally by the founders.

Create a term sheet and define key data

If an investor could be won, the next step is to negotiate the key financial aspects of the financing and the participation of the venture capital provider in the start-up. A so-called term sheet is suitable for recording this legally non-binding is. This means that both sides are not obliged to conclude the participation agreement on the terms specified in this document or to sign a participation agreement in general.

Rather, the purpose of this document is current status of the negotiations and the verbal agreements that have already been made. A term sheet is often updated during the negotiations. When setting up, both sides have to show their colors on how the deal should go. The aspects met here form the basis for the preparation of the final participation agreement. For the term sheet creation there is no fixed requirements. Keywords or key points as well as formulated regulations can be used. However, it is important that both parties know what these mean. To ensure that nothing goes wrong during creation and that all points are considered, a term sheet can be created using online tools such as B. the Term-O-Mat (external link) can be created.

Examination of the start-up as part of a due diligence

Before the investor provides the company with venture capital, he first thoroughly examines the business model and the economic and legal basis for founding the company. This includes specifically z. B. Sales figures, shareholder structures or possible connections to white-collar crime as well as corruption and tax evasion. this one verification process is also referred to as due diligence. The aim of this is for the investor to secure as much as possible whether the assumptions and requirements for the investment in the start-up are correct and whether all risks relevant to him are known.

Sign a participation agreement with the investor

If there are no objections on the part of the investor and the parameters of the financing round have been successfully negotiated in the term sheet, the binding participation agreement can be concluded. In particular, the participation quota and the investment sum are recorded in this. Here it can be said that it is easier for a start-up to make its own proposal for the contract than to change various points in a draft prepared by the other party. To be on the safe side, it can legal advice do no harm when concluding a participation agreement. Because especially when the founders are still inexperienced and their first business start-up with venture capital is pending, contract clauses are checked less carefully – after all, you want to receive the long-awaited capital injection for the business start-up as quickly as possible at any price. But beware: at the latest when the company exits, the clauses previously signed in the participation agreement can have a detrimental effect on the founders, be it financially or with the right to have a say in their own start-up.

To avoid this, should professional advice be caught up. On the one hand by a lawyer who checks the legality of the contracts, on the other hand by a consultant who supports the founders in the entire financing process as part of a business start-up consultation (tip: subsidies possible). Because the negotiations are time-consuming and can take up to three to six months. A cool head is required here.