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Posted on January 16, 2013 @ 10:14:00 AM by Paul Meagher
If you are prepared to give up a percentage of your company in exchange for financing then you might want to consider how this will be done. It is one thing to offer a percentage of your company, it is another to spell out exactly how that percentage will be operationally defined.
Some investors who are less legalistic on these matters, might be comfortable with defining a royalty that they would expect to receive based on any sales the company makes. The royalty could be the percentage of revenues before or after expenses are taken out. The terms of any deal can either be investor favorable, company favorable, or middle of the road. A royalty before expenses would be investor favorable, after expenses would be company favorable, and some
selective expense accounting would be a middle-of-the-road compromise.
If you are asking for a larger sum of money, then there is a good chance that the investor will want you to alter your letters of incorporation to include them as a director and to spell out their rights as a director and partner in the business. If you have not already incorporated, then you may have to incorporate the business to legally satisfy the investor. The investor may be more versed in matters of incorporation and be willing to put in the time and some/all of the money required to set up a proper legal framework for the joint venture company; if not, then it would be a point of negotiation as to who should pay any incorporation and legal fees. It should be noted that you can file all the relevant incorporation paperwork online if you are willing to spend some time learning how to use the government supplied tools for registering and updating an incorporated company profile. If you go this route, the expenses are not that much of a burden relative to the amount of financing you are requesting. I incorporated Dealflow Solutions Ltd. myself using online tools. The name search, federal incorporation, and provincial incorporation cost me around $500. I need to pay an annual fee of around $250 to maintain my provincial registration; different provinces charge different amounts.
These are a couple of ways you can operationally define what it means to give up equity in your company. The nice thing about seed capital is that angel investors tend be more flexible in defining how such equity is to be interpreted; when you start looking for the next round of funding, Series A funding, the venture capital investors tend to be more legalistic in how such equity is defined and how much control they want to exert as a director/partner in the joint-owned venture. They may want to limit their participation in that venture to a horizon of, say 5 years, after which they expect to be able to exit the joint venture with their capital and a defined return on investment. Investment capital might be contingent upon reaching milestones defined for the joint venture; milestones that bring the company to an exit point for the investor in a defined period of time.
Talk of incorporating your company or changing your letters of incorporation may seem a bit scary to someone not familiar with such matters. The flip side of this coin, however, is that if you plan to be a successful growing company then it is inevitable that you will need to incorporate and tweak your letters of incorporation. There are financing, liability, and tax-related benefits to doing so that you will want to take advantage of as you grow.
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