Equity Fund Raise

How an equity raise works end to end

A raise usually begins with a decision on why equity, how much, and what the money will do. From there the business is positioned: a short investment note, a model, and a story about market, traction, team and use of funds. Investors are then approached, a few take meetings, a smaller number go into deeper review, and one or two reach a term sheet. Due diligence and final documents follow before money moves.

The process is slower and less predictable than most first-time raisers expect. Investors are choosing among many opportunities, they consult partners, and they often wait for one more data point. A founder who plans only for the happy path can run out of working capital in the middle of a raise, so it helps to keep the business funded through the process rather than depending on it.

Types of investors and how to choose between them

Different investors suit different stages. Individual backers and angel networks tend to back early-stage ventures on belief in the founders. Family offices may take a patient view of established businesses. Venture funds look for businesses that can scale quickly and return a large multiple. Private equity funds usually prefer proven earnings and often take a larger share with more control rights. A strategic investor, such as a larger company in your industry, may offer markets or technology along with capital.

Fit matters more than price. Ask what the investor expects in terms of growth, timeline to exit, involvement in decisions and follow-on funding. A fund that needs a fast exit may push a steady family business toward choices it would not otherwise make. Speak to other founders in the investor's portfolio before committing.

Instruments and structures in general terms

The simplest instrument is new equity shares issued to the investor. Many raises use instruments with extra features, such as preference shares that rank ahead of ordinary shares on exit, or convertible instruments that begin as a loan-like claim and convert into shares at a later event. Each carries different consequences for control, dilution and what you receive if the business is sold.

Which structure is available depends on your company's legal form, on securities and foreign investment rules, and on the investor's own mandate. Those rules change and have formalities, so involve your company secretary or counsel early. Lalsar helps you understand the commercial effect of each choice; it does not provide legal opinions.

What investors examine

Investors look first at the team and whether they can execute, then at the market and the problem being solved, then at traction and unit economics: how the business makes money, how much it costs to acquire and serve a customer, and how that is expected to improve with scale. They examine whether the plan for the new money is specific, with milestones they can track.

They also look hard at the quality of information. Clean books, reconciled numbers, clear ownership, signed contracts, and compliance with tax and corporate filings build confidence. Gaps in records are among the most common reasons for a deal to slow or to be repriced during diligence.

• Team, its track record and its commitment to the business
• Market size, customer need and competitive position
• Traction, revenue quality and unit economics
• Use of funds, milestones and the path to a return
• Clean financials, ownership records and compliance

Valuation, dilution and the negotiation

Valuation is the price per share agreed between you and the investor. It reflects market conditions, comparable deals, the strength of your numbers and how much competition there is among investors. It is a negotiation, not a calculation, and no advisor can tell you in advance what you will get.

Dilution is the reduction in your proportion of ownership when new shares are issued. A higher valuation means less dilution for the same money, but an aggressive valuation can create problems at the next round if growth does not match. Think about the whole sequence of rounds, not just this one, and keep enough ownership with the founders to stay motivated and in control of what matters.

Governance rights and the term sheet

The term sheet sets the key terms before detailed documents are drafted. Beyond valuation, pay close attention to board composition, consent rights over matters such as new borrowing, large spending, changing the business or issuing more shares, information rights, and what happens to the investor's shares on a sale or wind-down.

Protective features such as liquidation preference and anti-dilution protection are common but vary a great deal in strength. Terms that look harmless in a good outcome can matter a great deal in an average one. Ask your counsel to walk you through scenarios, including one where the business is sold for less than hoped.

Diligence, closing and life after the raise

Due diligence is the investor's verification of what you have said: financial, legal, tax and commercial checks, and often references. Prepare a data room, meaning an organised set of documents, in advance. Answer questions directly. A problem disclosed early is often manageable, while one discovered later damages trust.

After closing, the relationship has to be run. Reporting is regular, board matters are real, and the new money is expected to be spent against the plan. A good partner adds introductions and judgment, while a poor fit adds friction. That is why fit is worth more than a marginally better price.