Partnering with a business angel, equity investor, or investment fund offers a compelling opportunity to secure liquidity while benefiting from strategic support and an extensive network. But how can you navigate this process effectively without risking the loss of control over your company? Experts weigh in with their advice.
"Opening up capital allows an SME to access new funds, develop growth opportunities, and strengthen its market position," says Fabian Teichmann, a corporate lawyer based in Zurich. However, without proper precautions, founders face the risk of losing decision-making authority – or even being forced out of their own company. So, when is the right time to open up capital? And how do you select the right investor? Two experts share their insights to help you take this step.
1. Start early
Founders typically begin by investing their own capital when launching a company. Only after developing a product or concept attractive to investors do they consider opening up their capital. However, external funding is often critical for young businesses – especially startups – that can benefit significantly from taking this step early. "It allows access to fresh capital without taking on debt," says lawyer Fabian Teichmann.
Opening up capital can also align with a company’s strategic goals. "This approach is particularly advantageous for businesses with strong growth potential or opportunities to invest in new projects," the expert adds.
2. Finding the right investors
In the early stages, business angels or foundations can provide funding without demanding significant guarantees. "Business angels often invest before a company generates substantial revenue, as long as there’s clear market potential," explains Dietmar Grichnik, a professor of entrepreneurship at the University of St. Gallen. These early-stage investors may even step in before the development of a minimum viable product (MVP) if they see strong growth potential or are convinced by the team’s caliber.
"Venture capital and private equity typically come into play later, once the business has demonstrated its growth potential through a solid market base or initial traction. As the company moves into its growth phase, institutional financing becomes the priority," Grichnik adds.
3. Maximize your company’s valuation
Opening up capital comes with the risk of founders losing decision-making control. "Ownership stakes are diluted, and new investors often bring changes to the corporate culture," explains Fabian Teichmann.
Securing a strong valuation beforehand not only enhances the founder’s position during negotiations but also attracts higher-caliber investors. Dietmar Grichnik puts it simply: "The higher the company’s valuation before opening its capital, the fewer shares the founder will need to give up."
4. Choose the right agreement
Entrepreneurs have a range of options, from shareholder agreements to investment contracts, depending on their company’s structure and funding needs. "For an LLC, a shareholder agreement might be suitable, while a corporation could consider a capital increase agreement. In early stages, convertible notes or SAFEs (Simple Agreements for Future Equity) are also popular choices," explains Fabian Teichmann.
To identify the most suitable agreement for your business, it’s best to consult with specialists. Organizations like the Swiss Private Equity & Corporate Finance Association (SECA) can offer valuable insights and guidance.
5. Focus on key contract clauses
To minimize potential legal disputes, it’s essential to ensure the contract covers critical aspects. It should clearly define shareholder rights and obligations, such as voting rights and dividend policies, while safeguarding the company’s structure through measures like preemption rights and anti-dilution protections. The contract should also establish clear exit strategies, including tag-along and drag-along rights and termination terms, and protect sensitive information with confidentiality and non-compete clauses.
You can include provisions like restricted voting rights or veto rights in the agreement to limit shareholder influence over decision-making.
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Engage employees with an employee share ownership plan
Employee share ownership (ESOP – Employee Stock Option Plan) offers employees a stake in the company through shares or stock options. "This approach is especially valuable for retaining key talent, particularly in startups where high salaries may not be viable," explains Dietmar Grichnik. "An ESOP attracts talent while avoiding immediate capital dilution." However, these plans can be intricate and challenging, especially when involving international employees. "It’s crucial to work with a specialist to ensure the plan is properly drafted," Grichnik emphasizes.
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Last modification 04.12.2024
