How to avoid potential problems with venture capital funding

Venture capital funds don’t expect startups to be well-oiled machines. In fact, they go into potential deals knowing there will be problems. These issues range from disgruntled founders to disputes over who owns a company’s intellectual property. Acquirers are prepared for these issues and M&A and venture capital professionals will not be surprised to uncover some of these issues during the diligence process. However, when preparing for equity financing it is important that your company does not have the kinds of problems that may be so fatal that it kills your deal.

Establishing and maintaining good corporate hygiene will pay dividends as you negotiate your venture financing. By preparing in advance, you can minimize some of the pain and effort in the diligence process and focus instead on negotiating the best deal for your company.

Here are some tips on how you can properly prepare for your equity financing.

1. Create and maintain a reliable capitalization table. Your company’s capitalization table is the first item any potential investor or acquirer will ask to see when considering an investment, acquisition, merger or strategic transaction. Your capitalization table should include who you have sold stock to, for what price and in what quantities, whether those shares have certain voting rights and other related information. When you pitch to a VC firm and they are interested in your idea you don’t want to make them wait an additional week as you scramble to contact your investors to see who owns what and to create your stock table. Your ability to quickly furnish a clean and accurate cap table will impress investors and give the impression that you are organized and in command of your business. As your company grows, your capitalization table will be your first point of reference for handling stock options and tracking compliance with regulatory requirements. Outside counsel or an accountant should prepare and maintain your cap table.

2. Protect your intellectual property.