Investing in a startup can be an exhilarating journey filled with potential rewards. But, like any journey, it is important to understand the language of the landscape. In the venture capital world, this language comprises legal terms that every investor, be it a seasoned venture capitalist or an aspiring angel investor, must comprehend. Lack of this understanding may lead to expensive mistakes. As such, this article shines a spotlight on four key legal terms every investor should be well-versed in: 

1. Valuation 

2. Option Pool 

3. Liquidation Preference 

4. Pro Rata Rights 

In the course of investment, two primary concepts always hold importance: economics and control. These form the bedrock of early-stage investing, where high risks necessitate mechanisms to capture both the potential losses and gains. Moreover, control, usually divided between the company and the investors, plays a significant role. Even though the founder may have the reins of the company, it is crucial for investors to ensure they can influence certain company decisions and veto those they disagree with. 

Valuation is the cornerstone of any investment. In the venture capital world, this term is typically divided into pre-money and post-money valuations. Pre-money valuation denotes the company’s worth before the investment. It is often a challenging task to determine this in a company’s early stages due to the absence of financial statements or earnings. Here, factors like market size, competition, and potential growth are taken into account to estimate the company’s worth. On the other hand, post-money valuation is the company’s value after the investment, calculated by adding the pre-money valuation and the investment amount. For instance, if a startup with a pre-money valuation of $10 million receives a $5 million investment, the post-money valuation would be $15 million. This valuation affects your ownership percentage, and hence, the potential return on investment. 

The Option Pool is another critical term that refers to a reserve of shares set aside for future advisors, employees, and consultants of a company. It’s a common practice in startups to incentivize individuals by offering shares in the company, which can become increasingly valuable as the company grows. Typically, the option pool ranges between 10 and 20% of a company’s total outstanding shares. Investors often prefer the option pool to be a percentage of the post-money capitalization to avoid dilution of their ownership percentage. 

Liquidation Preference determines the payout order after a liquidity event like a company’s acquisition. Usually, investors are paid first, followed by preferred and then common stockholders. There are two key aspects to consider here: the multiple and participation. The multiple can be 1x, 2x, 3x, or any other multiple, representing the return on the original investment. Participation refers to the investor’s right to receive their initial investment back and also participate in the remaining proceeds. 

Lastly, Pro Rata Rights are crucial for investors, particularly those involved in early-stage or angel investments. These rights give investors the option to buy additional shares in future financing rounds to maintain their current ownership percentage. This is especially important to safeguard against dilution as the company grows and raises more money. 

These four terms form the fundamental legal jargon every venture capitalist or investor should understand thoroughly. As every company and investment is unique, it’s essential to make these terms clear during negotiations to prevent costly misinterpretations and to ensure a smooth and successful investment journey. 

Embarking on the journey of establishing and eventually selling a startup is a unique experience, laden with valuable lessons at every turn. Each startup journey is idiosyncratic, but there are some universal takeaways that can guide entrepreneurs on their path to success. Here, we’ll delve into five pivotal lessons learned from building and selling a startup. 

Lesson 1: Start With a Powerful ‘Why’ 

Firstly, the importance of having a clear purpose cannot be overstated. The passion you feel for your startup should emanate from a deep-rooted ‘why.’ This ‘why’ is your motivation and the driving force that propels you through the inevitable trials and tribulations of your entrepreneurial journey. 

Your purpose should not solely revolve around financial gain. Instead, it should align with solving a problem, meeting a need, or making an impact in a field you genuinely care about. Investors, employees, and customers can sense authenticity, and a well-articulated ‘why’ can be an infectious force that cultivates trust and loyalty. 

Lesson 2: Embrace the Value of Building the Right Team 

The second lesson is about the essence of team building. Startups are not one-man shows. They require the combined effort and expertise of a dedicated team. It is the synergy among team members with complementary skills that often determines the startup’s trajectory. 

When building your team, prioritize cultural fit and shared values alongside skills and experience. Your team members should be able to work together effectively, adapt to the startup’s fast-paced environment, and remain committed to the shared vision even in the face of adversity. 

Lesson 3: Stay Lean and Adaptable 

Lean and adaptable are two keywords for any startup. A lean startup minimizes wastage of resources while maximizing productivity. The lean model means your startup should constantly measure, learn, and build. This cycle promotes validation of ideas before investing heavily in them and pivots quickly if something isn’t working. 

Adaptability is equally important. The ability to swiftly change course in response to market feedback is vital. Startups operate in a volatile environment, and rigidity can be detrimental. Embrace change as an opportunity to grow and improve. 

Lesson 4: Understand Your Customer and the Market 

Understanding your customer and the market is the cornerstone of any successful business. Your idea may be revolutionary, but if it doesn’t resonate with a need or a desire in the market, it might fall flat. Customer research, competitor analysis, and market trend tracking should be continual processes in your startup. 

Use customer feedback as a tool to refine your product or service. Engage with your audience and strive to build a community around your brand. This interaction and engagement will foster customer loyalty and provide insights into evolving market trends. 

Lesson 5: Prepare for the Sale from Day One 

Finally, if your goal is to eventually sell your startup, you need to prepare for this from day one. Every decision you make could impact the future salability of your business. This includes maintaining clean financials, protecting intellectual property, structuring contracts correctly, and ensuring a scalable business model. 

When it comes time to sell, proper due diligence can help you determine the right timing and prospective buyers. Furthermore, it would be best to seek professional advice during this process. There are many legal and financial intricacies involved in selling a startup that could significantly influence the outcome. 

In conclusion, building and selling a startup is a marathon, not a sprint. It demands resilience, patience, and the courage to take calculated risks. These lessons provide a roadmap but remember, the journey is highly personalized. At the end of the day, it is your vision, your decisions, and your lessons that shape your unique entrepreneurial journey. 

As we celebrate Jewish Disability Awareness, Acceptance, and Inclusion Month (JDAIM) in February, we can reflect on how our community can grow stronger by embracing inclusion in all aspects of life, particularly the workplace. ProMontreal Entrepreneurs works with businesses and startups that want to create innovation and impact. One of the most important decisions a business leader can make is to create a workplace that welcomes people with disabilities.  
 
Employing people with disabilities is more than just a moral imperative; it’s also a sound business strategy. Here’s why.  
 
1. Access Untapped Talent 
People with disabilities are frequently overlooked during the hiring process, despite bringing unique skills, perspectives, and determination to the workplace. Many have developed exceptional problem-solving skills, resilience, and creativity while navigating environments that were not always designed with them in mind. These characteristics can translate into new ideas and innovative approaches that will help your business thrive.  
 
 
2. Promote Innovation through Diversity 
Diversity is a proven driver of innovation, and people with disabilities bring unique perspectives that can help your company reach a larger customer base. According to an Accenture study, companies that embrace disability inclusion generate 28% more revenue, 30% more profit margins, and double the net income of their peers. By cultivating a diverse workforce, your company can better meet the needs of a diverse market.  
 
 
3. Improve team culture 
Hiring individuals with disabilities can have a significant positive impact on workplace culture. It fosters an environment that values empathy, inclusivity, and mutual respect—characteristics that encourage greater collaboration and loyalty among all employees. When your team sees that you value inclusion, it boosts their confidence in the organization and inspires them to give their all.  
 
4. Strengthen Customer Loyalty 
Consumers are increasingly drawn to businesses that stand for something more than profit. Committing to inclusion demonstrates your values to customers, clients, and partners. It’s more than just good PR; it fosters trust and loyalty among a growing demographic eager to see businesses do good in the world.  
 

5. Tap into Available Resources  
Hiring people with disabilities does not have to be difficult. There are many resources, grants, and training programs available to help businesses create accessible workplaces. Ometz for example, and other community partners can assist you in connecting with qualified candidates, providing workplace accommodation support, and ensuring your company thrives as an inclusive employer.  
 
 
 
Take Action During JDAIM.  
As business owners, we can influence the future of our community. This Jewish Disability Awareness, Acceptance, and Inclusion Month, let us pledge to break down barriers and ensure that everyone has a seat at the table.  
 
Let’s make inclusion our business.  
 
Are you prepared to take the next step? Contact ProMontreal Entrepreneurs to find out how we can help you connect with organization such as Ometz that can help create a more inclusive workplace. 

Brandon Svarc; is a founder who decided to do the exact opposite of what his competitors were offering in order to succeed. Naked and Famous Denim is a high-quality denim brand that is not like any other pair of jeans out there. Made out of only the best fabrics and priced at a point where you get your money’s worth. Today’s fashion industry is focused on glamour and celebrities rather than quality. Naked and Famous Denim’s primary focus is quality.

We are proud to have funded this business and once it became successful, founder Brandon Svarc joined the PME committee in order to help other entrepreneurs like himself. We had a chance to speak with Brandon and he shared with us his success story but also gives us insight into what he has noticed while being part of the PME committee. He shares with us some tips and advice he has learned along the way.

1. What made you start naked and famous denim?

I started Naked and Famous Denim because I wanted to start a brand that was the opposite of all the other denim brands on the market. I realized all high-end denim was based on corrupted values and was highly overpriced for the quality of them. My main motivation was to create the best possible jeans on the market.

2. How does your denim brand differentiate from other brands?

Our denim differentiates from other brands through our product values. When I started this business in 2008, my competitors were all Hollywood or celebrity-endorsed brands. What they sell are glamour and million-dollar ads, what I sell is quality. It is simple: no ads, no stresses/rips, no product giveaways, and no celebrity endorsement. We are focused very much on the product and quality, that’s it. We stick to a concept my grandfather taught me, making better quality products than your competitors for a better price.

3. How did you come up with this idea? Why Japan?

My family has been in this industry for 70 years. So, this has always been a part of me. When I was born, my father even made a line of jeans in my name. However, I was still tackling something I didn’t have much experience in. My concept was simple, to make the best product I can sell at the most expensive stores but sell them at the opening price points of those stores. I set a goal and went from there. The first goal I set was to sell at Barneys and we accomplished that in our first season of selling. After that, we continued selling there for 16 more seasons in a row.

In order to make the best possible product on the market I did a lot of research. I knew I wanted to make them locally in Canada because I wanted to support the local market. Next, I needed to find where the best denim fabric is. After countless research, I found it in Japan. When I found the Japanese denim and saw how much they obsess over it I knew this is what I needed. With the amount of detail and innovation that went into the material, stitching, and washing, I knew this was it. My goal was to find the best fabric, and make it in Canada, for the lowest price, with no ads, no celebrities just keep it simple.

4. What were some of the most challenging obstacles that you had when building your business and how did you overcome them?

Sales were one of the biggest challenges I had when I started out. I had no sales experience. Even though my family was in the clothing industry they still never really targeted what I was going for. This was a big challenge when I wanted to sell in every high-end store with no experience or pre-existing contacts. However, this didn’t stop me from going door to door to every store asking them to sell my brand. By going door to door to different stores, this helped me learn and practice and eventually I became really good at it.  I had a lot of people turn me down and even throw me out of their stores but I didn’t give up. Eventually, I had those same people who kicked me out of their stores call me back to ask to sell my brand.

5. What kind of risks did you need to take as a founder in order to be where you are today?

There are a lot of different risks that every entrepreneur needs to take in order to be successful. Not using ads or following the conventional path that most people in the fashion industry take was a risk but I wasn’t too worried. There are a lot of competitors on the market I was going after, however, I knew if I made the best quality product then the rest would follow.

Most people who work with corporations don’t have the constant anxiety of will my company go out of business. Usually, there is a level of security in those employed positions. As a founder, you don’t have this sort of safety net that is offered when you work for a company. That’s a risk you need to be willing to take.  I constantly had this anxiety about if my business will actually make it and if people will buy my product or if this was all for nothing. That’s a risk I was willing to take because I believed in my product and was passionate about what I was selling.

6.   If you can give one piece of advice or a golden rule for an entrepreneur starting out what would it be?

 One piece of advice I like to share with young founders is something that was told to me. When the time came to sell to high-end stores in Ontario, I set out to find someone with pre-existing knowledge and contacts about the Ontario market. I did not have much experience and I knew I needed to find someone to sell my denim for me. I finally found the perfect person, whom I contacted and arranged a meeting with. After pitching my denim brand to him, he was amazed by my product. However, he declined to sell my denim for me. He declined because he said the best person who can sell my product was me.

No one else has the passion and product knowledge for your own product other than you. You need to sell your product yourself. That’s what I like to tell young entrepreneurs. Even if you have no sales experience or contacts you need to take a chance on yourself because nobody knows the product better than you.

7. As a board member, you’ve seen many entrepreneurs pitch their ideas. What are some of the biggest mistakes people make when pitching?

The biggest mistake I’ve seen founders make when pitching is over-selling it. Some overestimate their financials and that doesn’t go well with the board. Obviously, these numbers are based on assumption and it’s good to dream big. However,  if you’re going to over-exaggerate your numbers you need to be ready to defend those numbers with facts. Be realistic. 

8. Naked and Famous denim is a PME-funded business and you are a board member, what kind of advantages has PME provided to your company along with others you see come in?

Of course, the loan itself can help with the pre-seed funding to get things running. By being a board member, I’ve seen how willing everyone is to make connections for the founder. Even if they don’t get the funding, we will still try to help them in every way possible by connecting them with the right people. Everyone will look through their network in the Jewish community and put them together. We really want everyone to succeed and it’s not just about giving them the money to help them to do that.

Every founder should take note of the passion and dedication that Brandon Svarc exemplifies. He believed in what he was selling and had faith in his product. He had a straightforward, simple concept and executed that successfully. Passion is key when you’re a founder because if you really believe in what you’re doing then everything else will come. His jeans are now sold across numerous stores across the globe.

PME’s goal is to help every entrepreneur that comes in to succeed. It’s not just about giving them the financial tools but also mentoring them and putting them on the right path to succeed.