So you want to raise money from outside investors? Remember that old adage: “No free lunch”? Well, in outside funding the rule applies more than anywhere else. Best to ask yourself, “Have you considered what strings are attached?”
External equity, debt or some combination are viable means of financing your growing business and taking the venture to new levels. That’s what Venture Capitalists (VCs) can help you achieve. But never forget that VCs have financial goals of their own. Before you sign the term sheet, you had better understand the fine print. This article is intended as a primer to term sheet basics.
Outside funding offers many advantages to growing businesses, such as working capital to fuel faster growth and stronger capitalization to lower future lending costs. However, taking outside money changes the way you manage your company in ways that as an entrepreneur you may not like. You probably won’t work for yourself any more; there will be a Board to report to. You’ll have fiduciary responsibilities to your shareholders, and, depending on how your financing is structured, potentially wider reporting requirements which could include audited financial statements for compliance with financing covenants or SEC requirements. Before you seek capital, it is important to understand the ins and outs of a term sheet, so you can make informed decisions about your future operations. This knowledge will not only enhance your stature and credibility with funding sources, but will help you safeguard your business vision.