Aside from helping clients who have gone through the fundraising process, I have recently attended two events in San Francisco on the topic of funding, which got me thinking more about the importance of having a funding plan. There’s a few pitching tips that were given at both events: know your potential customer & your numbers (expenses and ability to scale). Deliver the pitch with a memorable and relatable story. These are great tips for your opening presentation, but happens once you are through that initial pitch stage? What is stage two of the plan? Having your legal and financial documents in order can make the journey to “yes,” much smoother.
As with all our posts, this is just general information, not legal advice, please contact an attorney to discuss your the specifics of your funding goals.
Incorporation of C-Corp
Most investors prefer the Delaware C-Corporation over other entities. This is because of rules governing Delaware C-Corporations that are favorable to investors. Even if you are not headquartered in Delaware, you can become a Delaware C-Corporation by creating your corporation in Delaware (easily done through the mail), and then registering that Delaware corporation as a foreign corporation within the state that you plan to operate from. Choosing this method will have tax consequences, so do check with an accountant to see if this is the right move for your company.
IP Assignment Agreements
At the start, you’ll be moving fast to build your fashion or cosmetics line. You may be working with various designers or inventors to help you with the process. In the early stages of experimentation, it is common that company founders get so focused on perfecting the product that they forget to clarify with collaborators who owns the creations (either portions or an entire final product). As the designing stage moves forward, collaborators will disagree about ownership or move on to other projects. It is important that in the early stages of development, you create IP (intellectual property) assignment agreements, as the relationships are friendly and similarly goal oriented. The agreements will serve you in the funding process as investors look for potential risks in the company, such as a third-party claiming ownership to your company’s creations.
Founder Stock Assignments
Your potential investor will ask for the founder stock assignments and employment agreements of you, your co-founders and early employees. Investors do have mixed feelings as to what they’d like to see in these agreements. Some prefer to see that several people have ownership in the company, so that the company will be “cared for” by a variety of people, and not just one leader, thus leading to diverse resources and ideas. Other investors worry that if there are too many owners early on, the company may have to buy-out early stock owners who no longer serve the company, or that frequent disagreements will slow growth. Do you research by learning the preferences of your target investors before distributing founder stock, but have these agreements written before seeking funding. Also, pick your cofounders carefully to show that you have a high-functioning and collaborative team!
Contracts w/ Suppliers & Manufacturers
Sometimes you may find a particularly special source for manufacturing or material supplies. Perhaps you have a supplier of ornately decorated fabrics, or you know a farmer that creates inexpensive organic cotton with a story will resonate with customers. These connections may give you the competitive edge that you need as a early stage company and investors will want to see these connections will continue. A contract does bind both parties, so make sure it can be a positive relationship before agreeing to any long term contract. Just like a positive contract may boost your funding chances, a negative one can hinder investment.
Licenses & Permits
Many fashion companies start at the kitchen table, with sales at craft shows or on websites like Esty. While these activities may feel like hobbyist beginnings, it is important that you are securing the licenses and permits that you need to do those activities so are aren’t facing fines or penalties in the future. Investors love to see a forward thinking entrepreneur who is setting herself up for growth and recognition. In California, you will need at least a seller’s permit for these activities. Once you have the seller’s permit, calendar your quarterly sales tax reporting so you won’t be facing fees for delinquent taxes. If you are manufacturing clothing with a third party in California, or you have set up your own small manufacturing operation, secure a garment manufacturing permit.
I hope these tips help to get you started! As you move forward with your investment plan, it is wise to contact an attorney and an accountant. If you would like to contact Law On The Runway, please email Rachel@lawontherunway.com