Venture Capitalists are usually referred to as the force that sustains start-ups. They have earned the reputation of being the life-blood of the business community. Start-ups and new business turn to Venture Capitalists for huge investments or capital.
By their very nature, Venture Capitalists offer huge investments in exchange for equity or a sizeable portion of stocks in the firm. This by default puts them in a position where they can exercise a certain amount of control over the functioning of the start-up or business. Start-ups also count on experienced Venture Capitalists to act as business advisors. With such a substantial amount of power being bestowed upon them, sometimes the decision-making function of the founders or the board could be easily influenced or swayed by your Venture Capitalist. So, it is important to demarcate and understand when you should seek your lawyer's advice, and when you should follow the opinion of your venture capitalist.
Given that they hold a fairly big portion of equity and have invested a sizeable amount in the business, they have a vested interest in the workings and ensuring maximum profitability as fast as possible. While they invest only after considering the prospects of the business and believe in the viability of the same, it also means that Venture Capitalists would focus on maximizing immediate returns and therefore their advice may overlook long term benefits.
There are several aspects of a new business that founders must be in control of. Managing all the Intellectual Property and securing them through the necessary legal means is key. This is an area where your lawyer would have a better hold over, than your Venture Capitalist. Before diving deep into the Venture Capital world, it is important to sit down with your lawyer and your board and estimate the amount of investment that is required and how much equity would have to be offered to match the investment. Understanding the stakes involved in raising capital through VC’s is an area where your lawyer can best prepare you for. The terms proposed or suggested by the VC’s for the investment can be interpreted by your lawyer, who will in turn advise you and give a detailed assessment of how those terms will impact your business.
Similarly, there are instances where your VC knows best. Having been involved in the field, funding various start-ups and helping them grow exponentially, a VC understands the profitability and future prospects behind your product or service. Their exposure to this field over the years makes them unbiased judges to whether or not your innovation is worth the investment. The experience they have garnered over the years gives them the ability to understand the market and lay out a business plan that results in significant growth.
So, when formulating the business plan, leaning towards your Ventur Capitalist’s advice is the right choice. Their experience with the market trends and various products through the years makes them the best at strategizing management plans and formulating effective business models. As the VC also has a considerable stake in the business, their plans will lazer focused on reaching the target market and acquiring the projected profit margins.
The possible risks involved could be apprehended both by your lawyer and your Venture Capitalists. But both come into play in different scenarios. Market risks that could arise, from change in business trends to stock market crashes are all apprehendable to a reasonable extent, by a VC. At the same time protection of your Intellectual Property, financial transactions, taxation matters and, the legality of the conduct of business and allied transactions are all elements that are better suited to be dealt with by your lawyer.
While, both legal professionals and VCs bring different skillsets to the table, it is always ideal to have an advisory board comprising of a financial expert, a legal professional and, a VC to make a well-rounded decision. Ultimately as an entrepreneur, it is fundamental that you do not relinquish control of the decision making power. When your primary investor seeks to conduct business in a certain way or make few calls which they believe is the ideal choice for the future of the company, it is important to consult and avail the opinion of an objective source. As the situation or concern warrants, it is recommended to listen to the party that has the most authority on the subject.