Go to Blog archive

What Seed Round Investors expect from Start-ups

 

Post written by Dr. Michael Tschudin & Dr. Michael Baier.

 

Successful start-ups depend on an excellent team, a scalable business model and a convincing business plan. In addition, early-stage investors expect the full personal commitment of the founders. It is not sufficient to make corresponding statements in a pitch deck – the corporate legal documents should include this personal commitment.

The most significant financial incentive for the founders should derive from increasing the company’s valuation, rather than from salaries and bonuses. This aligns the interests of the founders and the investors. The same holds true in relation to employees, so an effective employee participation plan is key.

Corporate Structure – Shareholders

In order to build confidence and trust, the founders should incorporate a legal entity ( an “AG” [Stock Corporation] is best in Switzerland). Shares should only be issued based on a business standard shareholders’ agreement, which ensures that shares are not sold to third parties without a pre-emptive right of the existing shareholders, and that shares are subject to a vesting.

Shareholders should generally be operative in the start-up or at least contribute a strategic advantage. Usually, the operative founders should hold around 70% or more of the issued shares. Should this not be the case, the incentives for the founders should be increased by additional means or the founders should consider diluting the non-operative shareholders before contacting potential investors.

Legal Protection of Technology

All IPs necessary for the scalable business model need to belong to the start-up. While a licence from the founders to the start-up may be sufficient in the beginning (and in case the start-up fails, this may actually be prudent), no investor will fund a start-up which depends on a licence from a founder. It is generally easier and less problematic from a tax point of view, to transfer IPs at incorporation or right after it. In addition, all IPs generated by employees should be assigned to the company as part of their contracts of employment. An appropriate trademarks strategy should also be developed and implemented.

Customer Agreements

In most cases, the future turnover and therefore the business case, is based on existing and future customers. Customer agreements should be drafted carefully in order to legally facilitate future turnover. While close cooperation with partners may be an asset, such cooperation should in no way restrict the start-up company’s freedom to operate. Consequently, the scope of exclusivity clauses should be limited in terms of the use case, and in relation to their duration. Presenting state of the art customer agreements to a potential investor may considerably increase the chances of securing investment.

Early-stage investors look for start-ups that are ready to grow. An important requirement for sustainable success is the commitment of the founders and the corporate and contractual basis of the business model. For this purpose, leverage your counsel’s experience.

Feel free to reach out – we are happy to answer follow-up questions and to support you for building a successful start-up!