Success Strategies in Fundraising (VC / Angel) for Technology Entrepreneurs

Introduction

You can read dozens of bestselling books about what is required to achieve commercial success through technology entrepreneurship. In this article, however, we will discuss the legal risks involved and what can be done to minimize these risks from a legal perspective.

1. Identifying Investors: Focusing on the Right Targets

Not every investor is suitable for every startup. Entrepreneurs must allocate their very limited search and meeting energy only to investors whose investment criteria align with their venture. Do not disclose your trade secrets by signing an NDA just because an investor has agreed to speak with you. Do not waste time chasing investors where it is clear from the beginning that they will not invest. Also, researching the profile of investors and their past behavior toward entrepreneurs helps prevent future mismatches.

Useful Principles in Investor Selection

• Investment Stage: Screening by seed, Series A, B, or growth stage

• Geography: Local or global-focused investors

• Sector Expertise: Vertical markets such as AI, B2B SaaS, consumer products, health technologies

• Revenue Levels: Investment suitability based on annual recurring revenue (ARR) (e.g., above $1M ARR)

Legal Perspective

During investor research, signing a Non-Disclosure Agreement (NDA) with potential investors is important for protecting your intellectual property rights.

2. Founders’ Agreement: The Cornerstone of the Startup

A partnership in a startup is not only a business relationship but also a reflection of shared vision and strategic alignment. However, the initial harmony does not always last. Therefore, a founders’ agreement is vital for the long-term health of the company. Experience shows that even when founders act in good faith, things initially discussed can be forgotten or perspectives can change over time. For this reason, even the closest friends forming a business partnership must establish a written agreement defining partnership conditions.

A founders’ agreement defines the rights, responsibilities, and relationships among co-founders. It also provides a framework for preventing or resolving potential disputes.

a. Defining Roles and Responsibilities

As complexity increases within a startup, defining founders’ roles clearly is crucial to prevent uncertainty.

• Who will take responsibility for what? For example, one founder may be responsible for product development, another for marketing.

• How will decision-making processes work? To facilitate quick decisions, areas of authority must be defined.

  
  

b. Capital Contributions and Ownership Structure

Capital contributions and share distribution form the backbone of the agreement.

• Capital Contributions: One founder may contribute cash while another may contribute intellectual property (e.g., an algorithm). These details must be clearly written.

• Unequal Contributions: Founders do not have to receive equal shares; the nature of contributions may influence share distribution.

• Future Funding Rounds: How founders’ shares will be diluted should be planned ahead.

• Vesting: Implementing vesting for founders’ shares is recommended. For example, if a founder leaves or withdraws, they receive only the shares they have earned over time. A common practice is a 4-year vesting schedule with a 1-year cliff.

  
  

c. Decision-Making and Dispute Resolution

Potential disputes regarding strategic company decisions must be addressed in the agreement.

• Voting Mechanisms: Determining which decisions require majority vs. unanimous approval

• Key Decisions: Special decision processes for matters like selling the company, accepting new investors, or major expenditures

• Dispute Resolution: Appointment of a third party (mediator or arbitrator) when decision-making becomes blocked

  
  

d. Founder Departure Scenarios

A founder leaving the company can significantly impact its financial and operational structure.

• Resignation or Termination: How departing founders’ shares will be transferred (e.g., right of first refusal for remaining founders)

• Bankruptcy or Death: Clauses preventing seizure of founder shares due to personal debts

• Valuation Mechanisms: Determining share value during departure through a valuation process

  
  

e. Protection of Intellectual Property Rights

The most valuable assets in a startup are often the intellectual property created by founders. Ownership and management of these assets must be clearly defined.

• Registration and Ownership: All intellectual property contributed to the company must be transferred in writing, ensuring that economic rights are exercised by the company.

• Confidentiality and Non-Compete: Preventive clauses protecting trade secrets and IP after a founder leaves, including non-compete terms

  
  

f. Revenue Sharing and Compensation

Whether founders will receive salaries and, if so, how much, must be clearly defined.

• Early-Stage Compensation: Salary payments may depend on cash flow or be deferred

• Profit Sharing: Defining how profits will be distributed once the company becomes profitable

  
  

3. Preparing for Fundraising: Organize Your Documents

Before starting discussions with investors, preparing a set of essential documents is crucial.

a. Pitch Deck

A short, concise, and engaging presentation shapes the investor’s first impression. It should not be a copy–paste template. Instead, it must:

• Show genuine market research

• Present realistic financial projections

• Highlight POC/demo achievements

• Provide accurate information on founders’ backgrounds

Misleading information is always destructive and undermines trust.

b. Virtual Data Room (VDR)

A digital platform where investors can access detailed company information.Documents such as:

• Financial statements

• Legal contracts

• Intellectual property records

• Business plan

  
  

Indexing documents placed in the data room is important as it demonstrates professionalism and organisation.

4. Term Sheet Negotiations: Understanding the Legal Details

A term sheet outlines the major terms of an investment and can be binding or non-binding depending on the clauses. Every entrepreneur must understand its core components:

• Investment Amount & Valuation: Conditions and methodology for company valuation

• Exit Clauses: Investor expectations, exit horizon, and potential exit methods

• Shareholder Rights & Governance: Voting rights, board structure, preferential rights, veto powers

• No-Shop Clause: Restricting the company from negotiating with other investors for a certain period

  
  

Special attention must be given to clauses like liquidation preference and voting rights since these heavily impact the founder’s long-term control.

5. Key Components of the Investment Agreement

a. Investment Amount and Company Valuation

• Specifies investment amount and payment schedule

• May include milestone-based investments

• Defines pre-money and post-money valuationExample:If an investor injects $1M into a company valued at $10M post-money, they receive 10%.

  
  

b. Types of Shares and Rights

• Ordinary vs. Preferred SharesPreferred shares often include rights such as:

  • Liquidation Preference

  • Dividend Rights

  • Board representation, spending limits, pre-emption, tag-along rights, privileged liquidation rights, etc.

    
    

Critical point:Founders must ensure that governance rights do not leave the company’s operational speed and flexibility at the mercy of investors.

c. Board Structure and Company Management

• Whether investor receives a seat on the board

• Which strategic decisions require investor approval

• Ensuring founders maintain sufficient flexibility for execution and scaling

  
  

d. Vesting and Key People

• Vesting schedules to ensure long-term commitment

• Protection mechanisms for key employees and founders

• Share transfer rules in case of early departure

  
  

e. Financial Status and Reporting Obligations

• Regular reporting of financial and operational performance

• Investor audit rightsLack of transparent reporting mechanisms may cause trust issues.

  
  

f. Exit Strategies

Investors expect to recover their investment eventually. Common exit mechanisms:

• Initial Public Offering (IPO)

• Company sale / M&A

• Secondary market share transfers

  
  

g. Non-Compete and Confidentiality

• Preventing investors from investing in directly competing ventures

• Protecting trade secrets and confidential information