Startup-Idea-will-it-work

It seems as though there is a hot new app or service every week that revolutionizes the way we interact with one another and our surroundings. I would venture so far as to contend that the start-up craze has hit many of us closer to home as it’s no longer so far-fetched to have at least one person in our networks that are embarking on a new venture whether it’d be a family member, an ex-colleague, or an old classmate. Crowd funding has served as a popular destination for much needed capital for smaller scale projects and has acted as a great supplemental source of financing in addition to one’s own immediate network. However in the life cycle of a start-up, there often comes a time when financing in the form of (corporate) venture capital is unavoidable and becomes a necessity to scale up operations or to continue beta testing.

Luckily for today’s entrepreneurs, the financing landscape has largely tipped in favor of the entrepreneur as investors are granting start-up favorable terms with their investments at a far greater frequency. This is not to say that venture capitalists are eager to heap their funds toward start-ups without adequate protection for their investments, but rather this is a byproduct of the venture capital ecosystem undergoing a survival of the fittest-type adjustment process in response to the proliferation of venture capital funds in the past decade. Quality VCs are distinguishing themselves from their mediocre counterparts by relying on their ability to identify winners as opposed to depending on restrictive covenants in term sheets and forcing entrepreneurs to bear much of the downside risk should an investment go awry. As VCs are competing with one another to win over promising ventures by foregoing traditional protection mechanisms, more entrepreneurs have been allotted the opportunity to shop around for terms that were previously only imaginable for the most prized start-ups.

A quick glance of term sheet trends, the prelude to a more comprehensive and binding stock purchase agreement, reveals that VCs are abandoning terms that have historically been in the favor of investors such as participating equity stakes and senior liquidation preferences while instead vying for terms that align incentives with their portfolio companies. Some VCs such as Passion Capital are venturing so far as to ditch term sheets riddled with legalese aimed at fostering a trust-based relationship that attempts to mimic a level of partnership that a principal-agent relationship can realistically best achieve.

If you’re in the midst of pursuing a start-up or have always been interested in embarking upon one, there are tremendous resources such as NVCA.org and onecle.com that can provide invaluable insight into how best to structure financing agreements and to ultimately protect your project while securing essential capital. Given the wave of investor favorable terms in the VC-space, there may be no better time to invest some time into that passion project!

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