Once you start seeking out investors, it’s good to know the laws about the field and process. Keep reading as we help you understand venture capital law that investors must follow.
Imagine…
You’re the owner of a new startup, and you’re ready to make a splash in your industry. You have a stellar small crew, a solid business plan and even a prototype you’re ready to show off. Now all you need is some money to help get everything off the ground. The amount of funding you get from investors could make or break your business, so you want to make sure you do things right.
So, if you want to attract the right investors you should take the time to learn a little about venture capital law.
Demystifying Venture Capital Law
Venture capitalists have changed the way we do business. It’s estimated that venture capitalists only account for 0.4% of business funding sources. They may not be a big part of the average business owner’s funding process, but they’re still very important. However, venture capitalists can’t go around and write a check to any business that interests them. There are laws and procedures they have to follow to give companies funding.
You don’t have to be a legal expert to understand the ins and outs of venture capital law. All you need to do is keep these things in mind…
Dodd-Frank Rules
Since venture capital is considered a kind of private equity, many laws that apply to private equity are also considered venture capital law. In the past private equity wasn’t heavily regulated, but that changed with one act…
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 after the financial crisis. This act made sweeping changes in the industry, and changed the way most venture capital firms did business. One of the biggest changes the Dodd-Frank Act made dealt with is the Volcker Rule. Under the Volcker Rule, banks can no longer use their own money for private equity or for other investments. This essentially means that banks can’t act as venture capitalist firms.
The act also required private equity fund managers and hedge fund managers to register with the Securities and Exchange Commission. Although venture capitalists weren’t specifically told to register, many had to because of the way the Dodd-Frank Act defined private equity.
Laws and company roles
If you’re lucky enough find a venture capitalist to invest in your company or idea, expect them to take on a small role in your company. There isn’t anything in the law that dictates an investor has to have a specific role in the company, but it’s expected.
Venture capitalists invest in companies to make money, and they want to make sure that they protect their investments. A venture capitalist may seek out a big portion of equity ownership in the company.
Others may want to have a seat on the board of directors or a title that will allow them to take on an active role in managing the company’s operations.
Regardless of what they want, it’s important to set expectations before you agree to take any money. Consult with a lawyer when you’re ready to make a deal.
Wrapping up
Getting funding from a venture capitalist can help your business, but it’s important to remember what that legally means for your company.
If you have any questions about how to get in touch with potential investors and leads, visit our page of Investor Lists For Sale so you can see some of the options at hand of venture capitalists who are ready to talk about your needs.