Here is the typical process of raising a funding round for a Startup which translates to the below steps:-
I’ll skip step one and two from the picture assuming you’re through both these steps and investor has shown interest to hear you pitch.
- Pitching to Investors:
Whether you’re pitching your business casually to an individual investor or formally to institutional investors, angel networks or VCs, this is usually where you get started.
You reach this stage when they show interest to hear your pitch after looking at your credentials and/or pitch deck (screening).
Less than 5% of our monthly applicants qualify to pitch to our angel investors.
- Termsheet Signoff:
Based on several factors like investment instrument (equity, debt or a mix of both), stage of your business and structure of the investor (individual or institutional), you get a TermSheet (TS) from them.
The termsheet enlists all the terms of investment you mutually negotiate and agree upon.
The termsheets are usually non-binding and have an expiry date of 60 to 90 days at max to close the transaction and move to SHA (see step 4).
- Due diligence:
Upon executing the TS, you’re moved to financial and legal due diligence (DD) by the investor.
The rigorousness of DD is based on the age and stage of your startup (idea, PoC, post revenue or growth stage), type of investor (seed stage, angel, VC or PE).
This might typically take 4 to 8 weeks including workplace verification.
Important: Some investors do their due diligence even before moving to the termsheet stage.
- Shareholders agreement (SHA):
SHA has different names like offer documentation, definitive documentation, SSHA etc but only one purpose- protecting incoming shareholder’s rights.Upon getting the positive outcome from due diligence, this much more elaborated document is signed between investors and founders.
SHA covers a range of aspects to protect all the shareholders from the likelihood of any potential disputes arising in future. It is often signed on stamp paper.
Pro Tip: Make sure you get the vetting done from your corporate lawyer before signing anything out of good faith :)
After the execution of SHA, you get your ... In case of Foreign Direct Investments (FDI), the compliances are tough and the penalties for non-compliance are severe. Make sure to consult your CA, CS and corporate lawyer for the same.