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How to fund your startup: 3 tips

Guidelines Business Plan – Philips Innovation Award 2018
January 7, 2018
Your idea is amazing and your startup is going to conquer the world. However, almost right away, you find yourself asking, ‘Where do I find the funding to grow? Where should I start, and what do I need to know?’ Enter Pieter Paul Terpstra, corporate lawyer and partner at DLA Piper Netherlands, who shares three tips to help your company to achieve rapid growth.
1) Create a business plan and think ahead
A great idea needs funding to get off the ground. Even the most basic matters cost money: salaries, reliable computers with the necessary software, and so on. Generally, your savings will not be enough to fund real growth: you need help from outside, from investors. Most banks will be cautious to lend you the money. So how do you go about finding funding?

Pieter Paul Terpstra explains, ‘First of all, to obtain funding you need a solid business plan. That plan should explain everything about your business, of course; you have a great idea that you want to market. But just as important your plan needs to consider the future: where do see your company going? Thinking ahead is incredibly important at this point, so your plan should also describe where you see yourself in five years’ time. If you know where you want to go, that immediately gives you a strong narrative for investors – investors don’t get on board just to wait for their investment to grow of its own accord. Investors want to see a course plotted out and an end goal. An end goal might be for the company to be sold, or at least not to be financially dependent on you.’

Can you give an example of a startup that looked to the future?
‘Yes: a client of mine is the first investor in a particular venture. That venture was founded by someone who knows that his idea is scalable and understands how to roll it out. Still, he realised in time that he will need others if he wants to achieve real growth. He’s very knowledgeable in his field and has the ability to give direction to the business. But he’s less comfortable with the commercial aspects, so he also needs someone to run the operational side of the business. At the same time, the legal playing field where his company operates in is complex, so he also needs strong legal counsel. Of course these weren’t factors back when his business idea first came to him, but you need to keep thinking ahead all the time. Make sure that you involve the right people at the right time. One of the pitfalls is to grow too quickly without involving qualified people.’

2) Make sure that the legal foundations are solid
Besides funding, you also need the right legal paperwork. How do you go about this? Should a startup hire a legal expert straight away? ‘Not necessarily. You can find a great deal of information online. So look for parties and lawyers who will share basic information with you. Quite a number of standard formats are available online. DLA Piper also facilitates this, for example with our online DLA Piper Accelerate programme, where we share our market expertise with startups.

What legal matters do you need to arrange?
If you want to attract investors, from a legal perspective, you need to sort out your business structure. Investors are generally well-oiled machines that have their affairs all sorted out, and you need to make sure that they can see right away that you have your act together. Often this means registering your intellectual property rights. You also need to make sure that the arrangements with your employees are properly formalised. One potential pitfall is not having an arrangement with contractors on intellectual property rights that they develop for your business. This is somewhat similar to what happened when Facebook was founded, when the Winklevoss brothers claimed that the idea for Facebook was theirs.’

3) Be careful about giving too much away
‘The biggest dilemma that a startup faces is this. On the one hand, you want investors to invest in your company so that you can develop your venture to the point where you’re operating commercially. On the other hand, investors prefer to come on board when the commercial operations are already in place. That’s where some ventures come unstuck. As the owner of the business, you think that you have this amazing plan that’s going to take off, but someone else looking at it from outside wants to see it actually get underway first. So try and get to a point where you actually roll out your idea commercially, even if that’s just one client where you can show that your idea works. Once you send an invoice, that’s already the start of the commercial operation. You can tell investors, “Client A is on board”, the ball starts rolling and then Clients B and C might also become interested. If an investor sees that you still need to make the first deal, that might mean too much uncertainty to invest.’

What should you do at the very start, if you need growth capital before you are operating commercially?
‘One possibility to consider is asking family and friends. Will they invest? They won’t necessarily need to make a return, though I strongly recommend formalising some arrangements. In a next phase you have the 'angel investors': they come on board for commercial reasons and will want a return on their investment. An 'angel' is someone who believes that your plan is solid before you’ve started operating commercially and who’s willing to invest. Angel investors often invest in multiple startups at once, hoping that one of them turns out to be a success. The risks are greater for investors who come on board at an early stage than for investors who join further down the road. Remember that an early investor who runs more risk will demand a relatively larger share than someone who comes on board at a later point.’

How does that work?
‘In every investment round, the value of the shares increases, so each small piece of the pie has a higher price. This means that the number of angels that you can attract is limited. You want to sell the smallest possible stake each time, so make sure that you don’t sell stakes that are so large in every investment round that you end up as a minority shareholder. Then you’ll have lost control of your own company to investors who want to earn back their investments in the relatively short term. I’ve have seen this happen a few times.’
About Pieter Paul Terpstra:

Pieter Paul Terpstra is engaged in all aspects of corporate law. He has gained extensive experience in the fields of mergers and acquisitions, both strategic and private equity driven transactions, often with a complex cross-border dimension. In 2014 Pieter Paul was seconded to the Paris corporate team of DLA Piper for six months. In Paris, he worked extensively on (French law governed) M&A and private equity transactions. In 2016 Pieter Paul was seconded to the in-house legal team of a multinational life insurance, pensions and asset management company.

Pieter Paul has particular experience in advising clients on the energy sector, the insurance sector, as well as the technology sector.