3. Early Stage Capital. Two to three years into your venture, you’ve gotten your company off the ground, a management team is in place, and sales are increasing. At this stage, VC funding could help you increase sales to the break-even point, improve your productivity, or increase your company’s efficiency.

4. Expansion Capital. Your company is well established, and now you are looking to a VC to help take your business to the next level of growth. Funding at this stage may help you enter new markets or increase your marketing efforts. You should seek out VCs that specialize in later stage investing.

5. Late Stage Capital. At this stage, your company has achieved impressive sales and revenue and you have a second level of management in place. You may be looking for funds to increase capacity, ramp up marketing, or increase working capital.

You may also be looking for a partner to help you find a merger or acquisition opportunity, or attract public financing through a stock offering. There are VCs that focus on this end of the business spectrum, specializing in initial public offerings (IPOs), buyouts, or recapitalizations. If you are planning an IPO, a VC may also assist with mezzanine or bridge financing – short-term financing that allows you to pay for the costs associated with going public.

A key factor for the VC will be risk versus return. The earlier a VC invests, the greater are the inherent risks and the longer is the time period until the VC’s exit. It follows that the VC will expect a higher return for investing at this early stage, typically a 10 times multiple return in four to seven years. A later stage VC may be seeking a two to four times multiple return within two years.

IV. NON-DISCLOSURE AGREEMENTS (NDAs)

It’s not advisable to ask a VC for a non-disclosure agreement, and may even risk stopping your potential VC deal in its tracks.

Venture capitalists may review hundreds or thousands of business plans in any given year. Even if you think your ideas are proprietary, they may be just similar enough to another entrepreneur’s that the VC takes on the added risk of legal action against it just by signing your NDA. Also, for the VC, accepting NDAs adds the administrative burden of having to keep track of which NDA covers what entrepreneur’s ideas.

Rather than focus on an NDA, do your homework to find a reputable VC that can be trusted with your information.

V. TERM SHEET

A term sheet is a document that sets out the basic terms and conditions under which the VC will invest in your company. Work completed in the due diligence phase of the funding process is used to draft this document. The term sheet is generally non-binding and is used as a template, along with further due diligence, to draw up more detailed legal documents.

You will, no doubt, be particularly concerned with the valuation of your company set forth in the term sheet. To arrive at this figure, the VC takes into account your management team, your company’s market and competitive advantage in the marketplace, and your earning potential. The various factors that go into a valuation are determined during the due diligence phase. Note the difference between pre-money valuation – the valuation of your company before a VC invests in it, and post-money valuation – the pre-money valuation plus the contemplated investment amount.

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