MasiboLaw

Let us start from the beginning, you develop an idea for a new product or service. You tell it to some of your friends and when you get some positive feedback you start building the prototype. You use the little funds you have to develop a website, get a server and do some social media marketing to build awareness. Shortly thereafter you launch it to a small set of the market as you try to create product market fit.

After some time your marketing starts paying off a bit and you gain a number of users. Your product has gained a bit more traction and you now need funds to fuel the next stage of the process – growth. This means that you start offering equity in your business to other people in exchange for funding. You may also start pitching your ideas to investors who can put some money into your business.

Funding is a sensitive part of the process because you have come to a stage of your business where other people have a stake in it. This comes with a number of risks;

Loss of Control

When funding comes after a low valuation of your company, which is to be expected at early stages, it can lead to you having to give up more company shares than you would like just to get the funding you need or working with the wrong kind of investors. This means that it is important to consider whether you really need funding or you can survive through bootstrapping and the little revenue you are earning until the company can get a higher valuation.

Clash of Vision

When you raise funding too early it can limit your creativity and flexibility as a young company, as investors will want to have a say in the direction that you should take. This can lead to the startup’s original concept being watered down or the company being forced to take the direction of the investors as opposed to what the founders had originally envisioned. One way to avoid this is to be careful with the types of shares you are issuing investors so that you can gain capital without losing the vision for example you can choose to issue investors with non-voting shares that limits their participation in decision-making.

Losing Future Investors

Secondly, you have to be careful with timing. Seeking funding too early might mean giving more investors shares at an early stage of your business when your shares are cheaper. This can lead to over-dilution of the company shares making it less attractive to higher quality investors later down the road. One way to go around this is to be patient with valuation-based funding until you grow your company to a level you are comfortable with or to offer few, pricey and high-quality shares from the beginning.

In conclusion, it is important to weigh the pros and cons of how and when you are seeking funding for your start-up. It is also important to consider your individual circumstances and the specific needs of your business. It is also important to ensure there is legal certainty and clarity in the planning and execution of your investment arrangement. Read through the funding agreement, and understand what it means for your business both in the short term and long term before signing it.

The writer is a lawyer who specializes in offering legal services to people in technology, you can reach him through info@masibolaw.co.ke