What should I think about now that I have venture capital funding?
Takeaway: After getting venture capital, startups often are strongly encouraged by investors to ensure their corporate hygiene is more in order than it was before the financing. This includes properly classifying employees and contractors, having an employee handbook, ensuring they are compliant with tax requirements, and getting business insurance.
Securing venture capital funding can be a game-changer for a startup. But what should a company focus on once the funds are in the bank? In this post, we will discuss essential steps that startups should take immediately after raising venture capital to ensure a strong foundation for future growth and success.
Clean up your Human Resources (HR) practices
There are a number of HR matters that you might have been more loose with prior to raising venture capital funding. Now that you are funded, you’ll need to consider the following:
Employment Agreements: Ensure that all employees have signed employment agreements that clearly outline their roles, responsibilities, and compensation. These agreements should also include provisions for intellectual property assignment, confidentiality, and any restrictive covenants such as non-competition or non-solicitation clauses.
Properly Classifying Employees and Contractors: As your team expands, be cautious not to misclassify workers as independent contractors when they should be employees. Misclassification can result in significant legal and financial consequences. Consult with legal counsel to ensure proper classification and compliance with applicable labor laws.
Employee Handbook and Policies: With an influx of capital, startups are likely to experience rapid growth, including hiring new team members. It's essential to have clear policies and an employee handbook in place to ensure a consistent and legally compliant work environment. Review and update your policies to reflect your company's current needs and legal requirements.
Noncompetition Agreements: Consider implementing noncompetition agreements to protect your company's trade secrets and prevent employees from joining direct competitors. Consult with legal counsel to draft enforceable noncompetition agreements that comply with local laws. Many states (including California) have laws providing that noncompetition agreements are unenforceable.
Tax Withholding Requirements: With new employees comes the responsibility of withholding and remitting employment taxes. Ensure that your payroll systems are set up to handle these requirements and consult with a tax professional to ensure compliance.
Immigration Issues: If you plan to hire foreign workers, be prepared to navigate the complex immigration system. Consult with immigration counsel to ensure compliance with immigration laws and avoid potential penalties.
Confirm you are qualified to do business in the appropriate jurisdictions
As your business expands, you may begin operating in new states or countries. Review where your company is qualified to do business and ensure that you have obtained all necessary licenses and permits to operate legally in those jurisdictions.
Review your insurance needs
As your startup grows, your insurance needs will change. Review your existing coverage and consult with an insurance agent to identify any gaps or additional policies that may be required, such as Directors and Officers (D&O) insurance, Employment Practices Liability Insurance (EPLI), or Cyber Liability Insurance.
Review your accounting needs
A larger team and increased financial transactions may necessitate upgrading your accounting systems and hiring additional finance staff. Ensure that your accounting practices comply with Generally Accepted Accounting Principles (GAAP) and that you have robust financial controls in place.
Get ready for more paperwork
Raising venture capital often comes with increased reporting and documentation requirements. Be prepared to provide regular financial and operational updates to your investors, and ensure that your record-keeping systems are robust and well-organized. Establish strong lines of communication with your investors and involve them in key decisions where appropriate.
Conclusion
Securing venture capital funding is an exciting milestone for any startup, but it also brings new responsibilities and challenges. By taking the time to address human resources, insurance, accounting, legal, and reporting requirements immediately after raising funds, startups can set themselves up for long-term success and continued growth.