A group of friends with big ideas and little capital, now taking the first steps with a promising startup, will likely require a financial boost to get higher off the ground. Even an experienced entrepreneur might need some help with a new business. Enter a venture capitalist.

These individuals or firms that invest in companies that are often at the early stages of entering the market spent a record $130 billion on deals in 2018, making them an increasingly pivotal piece of the business world—one that can be a life saver for new businesses in need of cash.

Taking on a venture capital investment is essentially the same as taking on a partner. The investor or investors may not be involved in the minute details of the business, but they likely will want an active say in how the business operates. But, before they provide the money that will make an emerging company more viable, they will do their due diligence to determine if the partnership is a good fit.

If and when it comes time to seek venture capital funding, startups should have taken steps to look like a promising company worthy of an investment. There are many steps a business will have to take to get to that level, but a general understanding of a venture capitalist's wish list helps.

What Venture Capitalists Want

Reliable management: By the time a startup reaches the venture capital phase, it should aim to have a management team with proper experience and cohesion. Venture capitalists want to ensure their money will be used properly. It can be subjective and lead to difficult decisions, but team members seen as weak or inexperienced may need to be sidelined, and discord among the management team must be resolved prior to seeking funding.

Market space for the product: Venture capitalists' objective is to help startups grow, so is there a route for that growth? Is there market space for the company's product or service? If a market is too small, venture capitalists may see that as a limiting factor toward them getting a suitable return on their investment.

Unique product: Let's say a company is starting a ride-sharing service and app. Already, there are massive companies such as Uber and Lyft, presenting a market space concern. So, how does the company stand out from the crowd? Some ways to do so:

• Differentiation in price point—The product may be similar to an existing one, but perhaps there is a way to sell it for less. If it's more, then it's possible people will perceive it as—and hopefully it is—a better product. In this example, perhaps a guaranteed flat rate with no surge pricing might be key.
• Different process—The product may be similar to those already in the market, but there is a new way of doing things and what you are selling is this new and more efficient way of doing things. For example, having the ride-sharing app be somehow more efficient.
• Different product altogether—This is the most obvious way to be unique, where you have a product that is completely different and hard to replicate. We have seen this aspect as it relates to ride sharing in the form of scooter and bike sharing as well as other modes of transportation. In spirit, it's ride sharing, but ultimately, it's far different. A venture capitalist might see potential in a new product idea in an existing market space.

Matching investment philosophies: As with any partnership, the philosophy and direction of the business should align among partners. Most investors have different foundations for their approach, ranging from those who are in it only for the return, to those who are seeking a more strategic investment and playing the long game. Just as venture capitalists' do their due diligence, startups must do their research and approach the investors who match their own philosophy.

Responsible use of money: Understandably, venture capitalists will want to know up front how the startup is spending the new funding. New talent? Advertising? Acquiring a competitor? Experienced investors may have their differing opinions about the best way to grow a company and how their money should be spent. Honest and open discussions must be had by all parties, and contracts may need to be drafted.

Well-protected intellectual property: Often, the most valuable piece of a startup is its intellectual property (IP). Venture capitalists want to feel comfortable in the fact that the company has squared away all of its IP-related issues—of which, there are many—and sufficiently protected its rights, as IP rights are crucial to the value of the business—including, but not limited to:

• Ensure IP assignments are in place. These are agreements where the ownership of work product created for a company by an employee or consultant, for example, is transferred to the entity.
• Ensure all trademarks, patents and copyrights are registered as soon as possible to protect the IP, logos, marks and inventions of the business.
• Noncompetition agreements are important to implement so an employee or partner can't start or enter into a similar business or entity in competition against their current one. Certain states have strict laws limiting these agreements or rendering them unenforceable, such as California. Along the same vein as noncompetition agreements, restrictive covenants are also used to protect IP, as well as nondisclosure and technology transfer agreements.

How Sstartups Can Prepare for the VC phase

Consider entity type and name: Early on, startups should work with a business lawyer to take them through crucial phases to achieve their immediate objectives and set them on a path to their long-term goals, especially determining the type of entity they will be (e.g., corporation, limited liability partnership, limited liability company, etc.). In this stage, too, the business will need to decide on a name. That name should help it stand out from the crowd, lending it uniqueness and making it attractive to venture capitalists. It seems like a simple step, but it matters a great deal—and finding the right name isn't always easy.

Create co-founder and employment agreements: To the extent not covered in the governing documents of the business, co-founders may want to develop agreements that discuss a founder's potential separation from the business, perhaps through buy/sell provisions or shareholder agreements. In the same vein, it's vital that startups have documents prepared for new hires that set forth company policies, as well as an employee handbook that is periodically reviewed and updated as needed. All of these steps make for a more professional company that an investor is more likely to find worthy of their time and money.

Understand (and adhere to) the law: New owners who have just gotten their startup off the ground often are not aware of the applicable laws, rules and regulations involved in running a business. Moreover, as it relates to solicitation for funding, there may be specific laws, notices and filings required relating to securities regulations that apply. An experienced lawyer can help guide the owner or owners through what can be a confusing process.

Ultimately, when companies are seeking venture capital funding, it's likely the products, ideas and brainpower behind it all that will draw in potential investors. What will keep investors interested in a company is the professional demeanor and comprehensive grasp of its plan and goals. Legal counsel, especially early on, is always a valuable resource to be the kind of company a venture capitalist wants.

Maxwell Briskman Stanfield is an attorney at Meyer, Unkovic & Scott. He focuses his practice on corporate, business, financial and commercial real estate law. Stanfield can be reached at [email protected].