• How-to

You compared term sheets. You found the best deal. You signed. Congratulations. You are almost there. But before you can do the victory dance in private, there is the question of getting all the legalities done. And then you will have the money in the bank! And yes, then you can dance that dance.

Making it legal
It is important for you to understand that the term sheet is not strictly a legal document. Rather it is a financial one. The term sheet needs to be put into a legal form for it to be enforceable in the eyes of the law. This will be taken care of by the lawyers, but you should be alert to what goes into the legal version.

Combing the accounts
At this stage, expect a lot of accounting due diligence. This process can take anywhere between 2-3 weeks in India. Expect it to go longer if your accounts need some unjumbling. This is a normal process; so do not fret about it too much. By this stage, you should really have all thing sorted out internally.

The lawyer’s eye
Along with accounting due diligence, you would also come under some heavy legal due diligence. The investor has to be sure that all legal nuts and bolts are okay with your firm before he gives you his money. While this may have been part of the whole process earlier, it is more thorough and exact now because it is right before the payout.

Drawing up the deal
Finally, after the due diligence, you will be presented with what is called the investment agreement. This agreement will clearly mark out the quantum of funding, the equity stake divulged, the investors etc. It is important for your lawyer to comb through it like Sherlock himself. You need to be sure the legal form and language serve the commercial aspects of the deal, and not the other way round. Once commercial aspects are decided, your lawyer should put it in legal wording.

Stay sharp
The process of VC funding has no need for more documentation and agreements, and if you smell something funny, back off a bit and question it. It is also important here to note that many VCs will try to peddle agreement formats they have used in deals before. They will call it standard. Don’t fall for it.

Amend the AoA
After the investment agreement is signed and legally verified, changes will have to be made to the company’s Articles of Association (AoA), which contains information about the company’s shareholding pattern and directors. On an emotional level, this may be a big step for someone who has built the company himself. Just convince yourself that it is for the better of the company. This is the final step before you hear the sound of money in your bank.

That’s it. You will now be hopefully receiving a big fat check. Spend it wisely and judiciously for the right things. Bon voyage.

This is the last of an eight-part series. The rest of the articles can be found at www.entrepreneurindia.in

©Entrepreneur October 2010

Tags:
funding, legal, term sheet, venture capital