Lifecycle of a Technology Company: Step-by-Step Legal Background and Practical Guide from Startup to Sale

Chapter 2. FINANCING THE VENTURE

In this chapter we explore the business and legal issues that commonly arise in connection with the first financing of a technology company by "angel" or venture capital investors. These financings are almost universally equity financings. These investors, however, often do interim bridge debt financings. Debt financings are also fundamental to companies that are acquired in a leveraged buyout (LBO). The chapter also discusses the fundamentals of debt financings and provides an introduction to the structure and operation of venture capital and buyout funds.

VENTURE CAPITAL FINANCINGS

The venture capital financing of a new technology company is a significant step in its corporate life. To put it simply, "It isn't just your company anymore."

There are, of course, a number of positives to venture capital financings. A very high proportion of successful technology companies achieved their success in no small part because of the availability of venture capital, which is, in the most commonly accepted definition, capital available for investment in early-stage ventures, which are, for that very reason, high-risk investments. While the consequences of the investment excesses of the late 1990s may have temporarily cast venture capitalists (VCs) in a less attractive light, venture capital funds, and the tax and legal infrastructures that have fostered their growth, have been a key engine for the growth in the economy of the United States over the last 30 years. ...