If you want to take a company big, capital is often a critical need. This means looking into venture capital for most businesses. This approach has helped plenty of companies like Google and Tesla go public. Understanding the process, however, can be a bit difficult. In this article, we take a look at how this type of investor secures its investment in a business.
Why does a venture capital fund invest in a particular business? To make a profit. Yes, they may be interested in other issues, but the core purpose is to maximize their return on investment by quickly building your business and taking it public.
Most VC funds are going to invest millions in your company to make this happen. That is a sizable amount of money and the fund is going to want to secure it. There are different ways for going about this, but the most common is to buy what are known as “convertible preferred shares” in your corporation.
Convertible preferred shares are pretty much what they sound like. They are shares that place the owner in a preferred position to regular share owners so that the owner can reap the financial benefits of any corporate action first. The convertible aspect simply means the owner can convert this right into real shares at any time such as when the company begins the IPO process.
The VC manager will also look for further assurances beyond just taking a stock position. One is the right to elect one or more members to the Board of Directors. This gives the fund the ability to influence important decisions taken by the company, decisions that often ultimately lead to success or failure.
What do these steps establish in your relationship with the venture capitalist? A couple of things. First, they provide the VC fund with the best chance of getting a big payoff if you go public and are a success as well as a preferred asset distribution if the business fails. Second, it gives them the ability to influence how the company will be run particularly as it relates to key decisions. As a business owner, that is a reasonable exchange for the millions in funding that such a relationship can provide.