Understanding strategies for mitigating uncertainty and risks in early-stage fundraising is crucial for an entrepreneur. You’ll need to raise capital at every stage of building your new company. Capital is the lifeblood of the Business, and you’ll need money to have it up and running.

However, raising money from Investors comes with a set of risks which you should be prepared for. Also, plan for the best ways to mitigate the risks. Some of the most common pitfalls include dilution and loss of control over the decision-making powers in the company.

You’ll also open the company to liability and legal obligations, not to mention the possibility of being unable to pay. Before reaching out to investors, you’ll find the best ways to deal with the possible risks. Read ahead for detailed information on how to make that happen.

Explore Your Funding Options Carefully

Before scouting around for potential investment sources, research the options available to you. Also, explore the benefits and pitfalls of each option, which may include angel investing, crowdfunding, and bootstrapping. You can also consider venture capitalists, debt financing, incubators, and accelerators.

Read up on their criteria for approving your pitch, possible terms and conditions, repayment terms, and other investor requirements. You’ll want to ensure that you can meet their expectations before sending out the pitch.

Also, assess suitability for your business vertical and funding goals, especially the stage where your business is at. An early-stage company is still at the ideation stage and in the process of developing its products and services.

Such companies likely have a business model and plan to address a specific pain point in the market. They have not matured enough to generate profits but could have started earning revenues. You’re gathering market data and raising funding to build a robust customer base at this stage.

Developing a regular cash flow is also high on your list of priorities. Accordingly, you’ll need capital to assist with meeting these goals and, preferably, investors who can provide more than just funding. You’ll need industry-specific expertise, access to cheap resources, and networking opportunities.

With these goals in mind, you’ll network with angel investor communities, invest personal funding, and connect with friends and family. At this time, you’d want to minimize dilution and risks. Read ahead for more strategies for mitigating uncertainty and risks in early-stage fundraising.

Avoiding Dilution

Investors offering money to support your company will typically get equity in exchange. Ceding equity will mean that you lower your ownership stake in the business and, consequently, decision-making.

Dilution also translates into a lower percentage of profit sharing when the company starts earning revenues. This is why you’ll carefully work out the equity you want to offer and the valuation at which to raise funding. Here’s how:

Strategies to Adopt

• The best way to retain equity is by delaying borrowing capital as long as possible.
• When you do raise capital, pitch for enough money to keep the company operational for the next 18 to 24 months only.
• Rely on informal sources of funding, such as personal loans, bootstrapping, and crowdfunding deals. The longer you delay, the higher the company valuation will be. This means you’ll offer less equity for larger dollar investments at a later date.
• Before reaching out to investors, you’ll research the projects they’ve backed in the past. Pick out investors that have mission statements, values, and vision that align with your company’s.
• Make sure they won’t hamper the company’s growth prospects by, say, restricting R&D efforts. Or prevent the adoption of aggressive advertising and marketing strategies.
• You’ll also want to discuss the specific areas where the investors will have a say. For instance, when you want to bring expensive skill sets and talent on board to accelerate IP development.
• Selecting a list of investors that operate in your business vertical is advisable. They will likely have a better handle on how it works.
• Don’t hesitate to aggressively negotiate and push for fewer board seats for investors and voting rights.
• Demand higher value for your shares and resist the impulse to grab the first term sheet that comes your way. Scout around for better terms and conditions before snapping up the deal.
• Ensure transparency in the taxes, legal fees, and fees associated with the due diligence.

Retaining Control

Ceding equity and board seats in exchange for equity typically results in investors having a say in the company’s operations. The voting rights that they claim can give them decision-making powers. This means they have rights in proportion to their stake in the company.

This can present a problem if the founder has different views on how to scale and take the business forward. You should also be aware that, ultimately, investors are looking to profit from the capital they invest. They may exit or sell their stake anytime and bring in other investors with different goals.

Voting powers may also result in investors pushing you to sell the company. Or take it to IPO before you’re ready, which may lower the financial returns you were hoping to get. Disagreements about the direction to take the company and compromises on the founder’s vision can be detrimental to growth.

Strategies To Adopt

One of the key strategies for mitigating uncertainty and risks in early-stage funding is to outline your conditions clearly.

• Before pitching for funding, retain the services of an expert advisor to assist you in valuing the company. Underpricing or overpricing sets unrealistic expectations best avoided.
• Research similar companies in your industry vertical, growth stage, and geographical location. Use them as benchmarks to evaluate your brand’s traction, market fit, and growth potential.
• Look for investors who you can partner with and get industry-specific expertise and mentoring. You’ll also check their histories for how they handle conflicts and arrive at resolutions.
• Discuss and negotiate the anti-dilution and liquidation terms. Retain an expert lawyer and accountant to understand the implications and consequences of each term in the agreement.
• Look for hidden and unfavorable clauses that may weaken your control over the company.
• Most importantly, don’t hesitate to reject the term sheet and walk away to look for alternatives.
• If the agreement includes founder lock-up clauses, view them carefully. This condition restricts your ability to sell your stake in the company for a pre-determined time frame. They are meant to prevent the founder from exiting too early and give the investors time to profit from their investment.
• Regardless of the strengths they bring to the table, you’ll remain informed and involved in every strategic decision. Choose a board of directors and team that supports your vision and respects your authority.
• Communicating and providing updates to investors is a good thing, but don’t allow them to micromanage every aspect.
• Maintaining consistent innovations for the company’s growth reiterates the founder’s value in the company.

Minimizing Liability

When raising funding for your startup, be aware of the exposure to liabilities arising from legal issues. For instance, investors may require you to reveal information like employment contracts and share agreements. As part of the due diligence, they may want to see IPs and IP ownership titles also.

Founders looking for funding must submit financial projections, a business plan, and other details. Any other information that proves their company is a viable investment opportunity raises their chances of convincing investors. However, this process also risks revealing business secrets, and investors are typically unhappy about signing NDAs.

Despite adopting the best strategies for mitigating uncertainty and risks in early-stage fundraising, you’ll prepare for the possibility of the business failing. Investors may include certain contingencies for protection in case that happens.

Take your time understanding the liability, lawsuits, and legal action you’ll face by reading the clauses in the agreement carefully. For instance, investors may require participating or non-participating liquidation preference.

Or, they may include drag-along rights or tag-along rights in the investment agreement. Actions like these could result in their selling out the company with no proceeds left for the founders.

Ready to understand in detail what happens when you raise funding? Check out this video where I have explained what to expect and how to secure equity.

Strategies to Adopt

• Work around these liabilities by retaining the services of an expert legal team to view the clauses and advise you.
• Scouting around for alternative investment sources and providers is also an option.
• Be wary of bringing in different classes of investors. They may have their own objectives, values, and vision, which can result in differences of opinion and clashes over decisions.
• It’s advisable to avoid setting unrealistic expectations about the potential returns your company can generate when pitching for funding.
• Maintain your focus on the company’s long-term growth by grabbing opportunities that can have future benefits. Resist the pressure to make decisions driven by short-term gains to please investors. The company’s interests should be prioritized over investor profits. Be aware that hasty decisions can impact stability.

Valuing the Company Accurately

Valuing the company accurately is one of the best strategies for mitigating uncertainty and risks in early-stage fundraising. Both over-valuation and under-valuation will raise pitfalls you should be wary of and lead to financial difficulties in the future.

Over-valuation is when the company’s worth is estimated at a value higher than the market will bear. Investors find it harder to sell the company’s stock in the market since the share prices are too high. They may hesitate to invest in the company because the potential for returns is lower.

Undervaluation happens when the company’s worth is estimated at a value lower than the market will bear. An undervalued company may find it harder to evoke investor confidence in its ability to scale and maintain profitability. Not being able to raise adequate capital results in money left on the table.

You can avoid this risk by deploying reliable valuation methods like the discounted cash flow analysis or comparable companies analysis. You’ll also leverage data about industrial trends to price the company accurately and competitively.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Giving Up Equity Cautiously

Although founders are cautious about giving up equity to investors in exchange for capital, they often overlook other recipients. For instance, you may have offered stock options to employees as part of their salary packages. Or as incentives for exceptional performance or achieving milestones.

Company owners may also offer equity to partners that bring in expertise or other assets. Doling out equity to advisors and consultants when you’re low on cash and need services may seem like a good option.

But, you should be wary of lowering your ownership stake in the company and its long-term fallouts. To avoid this situation, you can explore other options to raise capital or give out rewards.

Think debt financing, revenue financing, or profit sharing. Also, consider giving investors ready products in exchange for the initial investment, like in the case of crowdfunding capital.

Additional Strategies to Mitigate Uncertainty and Risks in Early-Stage Fundraising

Having raised capital, spend the money cautiously and efficiently to gain maximum value from every dollar spent. Keep a close watch on the burn rate and cash flows even if the company is scaling quickly. Your objective should be to reinvest the revenues and profits to boost growth.

Managing risks at every stage of the company’s growth is a part of the scaling process. And the best way to counter pitfalls is to have contingency plans to deal with them.

Be ready to scale back operations and delay scaling if needed. You can also sell assets or lease them out temporarily if necessary, as in the case of Intellectual Property.

Your primary concern should be sustaining the company and keeping it afloat even if you’re unable to repay investors. To make that happen, have a robust business plan in place and hire a strong management team to complement your skills as the founder.

Most importantly, choose your investors carefully, making sure they will support your vision and offer valuable guidance and expertise. Review the terms and conditions of the term sheet and investment agreement carefully before accepting the capital.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.

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