The first official equity funding stage is called seed funding. Seed funding generally refers to the first official money that a business venture is able to amass. Following the seed funding round, startup companies which are too small to raise capital in the public markets or obtain bank loans, will often seek venture capital.
These new companies are generally small, privately held, and plan for subsequent initial public offerings or possibly a trade sale. Due to the high-risk nature of starting new businesses, many venture capitalists receive considerable influence over the startup company’s decisions and a significant percentage of the company’s ownership in return for their funding. VC funding is an expensive source of capital because of its high level of risk and the necessity of high returns. VC investors turn a profit when the startup is acquired by another company or merges with one. They can also make money when the startup goes public by holding an IPO.
Companies who are effective in securing VC funds are generally in a position for substantial growth. They may be based on a ground-breaking idea or be headed by an accomplished management team. They could also be built around an innovative business model or pioneering technology with the potential for substantial profits. Many successful technology startup companies have employed venture capital to fund their endeavors.
Venture capital is a type of private equity investment. The laws and regulations that regulate private equity are frequently applicable to aspects of venture capital investment. The Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. § 5301 et seq.) was passed in 2010. The Act implemented new legal requirements for investment banks, fund managers, brokers, and other professionals operating in the financial sector. Hedge fund managers and private equity fund managers must register with the Securities and Exchange Commission (SEC). For a venture capital firm to be exempt from the SEC registration requirement, they are required to have a minimum of 80 percent of their funds in qualifying investments. Up to 20 percent may be in shorter-term investments for the firm.
Raich Law attorneys provide operational counsel to startup clients on an extensive variety of issues. These early-stage matters frequently include structuring outsourcing arrangements, employment issues, compensation matters, intellectual property protection, enforcement and monetization, and policy documentation. Our staff is skilled in seeking a thorough understanding of your idea or technology in order to advise you most appropriately regarding the market in which you operate.