How to prepare a project for attracting investments and what you should know about them

When receiving investments from venture capital funds, business angels or simply third parties, you need to understand the following:

• Financing is provided in a ready-made legal structure. Funds are transferred to the bank accounts of a controlled legal entity. The jurisdiction of such a company should be suitable for the investor. For example, American investors are unlikely to transfer investments directly to a company registered in Ukraine / Belarus or offshore countries).
• As a rule, investments are not transferred at a time, but the amount is divided into tranches, the receipt of which is tied to the timing of certain tasks in the project. Thus, if the company does not fulfill its tasks, or the expenses go in an inconsistent direction, then all of the following payments may stop.
• Investments in the development of the project are targeted – that is, they must be used to achieve specific objectives.

Also, investments come in different types and, sometimes, may not be what they seem at first glance.

1. Debt (“Loan”). Such an investment is an ordinary loan, only the creditor is not a bank, but another company or fund. In this case, the contract specifies the repayment period, conditions, as well as interest that will be accrued on the loan amount. The investor does not expect to receive anything else from the company, except for his money with a plus sign.
2. Convertible loan. In essence, it is a debt investment with the right to shares in case of loan default. According to such an agreement, the investor provides the company with a loan, which can be converted into shares of the company. The Convertible loan agreement establishes these conditions:
   • Loan amount and interest that will be accrued on it;
   • Maturity and terms of early repayment;
   • Conditions for converting the amount of debt into shares of the company – the class of shares that will be provided to the investor and the cost of conversion. The number of shares will depend on the discount provided to the investor and other factors specified in the contract. Thus, for the risks incurred by investors in financing the project at the initial stage, it will receive a larger share in the next round of investments compared to other investors.
3. Investment in exchange for stocks. It is with this type of investment that such a concept as “project evaluation” appears. As a rule, funds are attracted to the project from specialized funds – Venture capital (VC). For example, a company receives an investment of $ 200 thousand in exchange for a 10% stake in the company, so the company was valued at $ 2 million.

It is worth noting that at this stage the Due Diligence of the project is carried out, which includes verification of the legal entity, corporate documents, financial statements, the identity of the founders and directors, company assets, including intellectual property, which is the main asset when investing in IT projects.

The main investment agreement is a fundamental document that describes in detail the procedure for providing funds, their intended use, the procedure for managing the company, issuing new shares, changing control, the procedure for distributing dividends, conditions for attracting new investors, consequences of liquidation, etc.

The provision of shares to the investor can be carried out in such ways:

• Sale of all or part of their shares by the current shareholder of the company. In this case, the company does not issue new shares and does not receive money from the sale – the share purchase agreement is signed between the shareholder and the buyer of the shares. Thus, money for the sale of corporate rights of the company is transferred to the personal account of the previous shareholder.
• An additional issue of shares (usually a new class, which has additional rights in relation to ordinary “ordinary shares”). In this case, as described above, the money goes to the company’s account and goes to the development of the project.

When preparing a project for obtaining external investment, it is necessary to clearly understand what legal structure and assets the company has, the conditions for obtaining and using investments, the possibilities for further management and development of the project.