So, you found an investor that is willing to hear what your company can do and how it will make everyone rich beyond their wildest dreams.
Let’s talk about actually structuring and negotiating the deal. The fun really is just starting. Now comes the negotiating and the harrowing process of really doing the deal and making everyone happy. The need to strike a balance between investment and investment acceptance is critical. Keep a few things in mind as we go down this path. The company’s concerns and the investor’s concerns that really need to be pointed out here.
As far as the company is concerned there’s going to be loss of management control, dilution of personal equity, repurchase of personal stock in the event of employment termination. How about adequate financing? Security interests being taken, key assets of the company? What of future capital requirements and dilution of the founder’s ownership? And intangible and tangible benefits of new investor’s participation, for example, access to key contacts and future rounds of capital?
Our investors’ main concerns…let’s talk about some of theirs. Their level of risk tolerance, return on investment, liquidity and the ability to provide future financing needs. Their influence on company strategy and decision making. Registration rights in the event of an IPO and rights to first refusal in future rounds.
Also, concerns of both parties, i.e. the company and the investors could be: resolution of conflicts, financial strength of the company post investment, and tax ramifications of the proposed investment.
Negotiations have to have ample time to be studied. Legal advice is first and foremost, and I beg you to get great quality securities attorneys working for you. Don’t be foolish and try to negotiate this alone. Legal fees are meant to be spent here where it counts for the future of the company.
These considerations can be overwhelming and you may think the deal will never get closed…it will, so be prepared to answer these and have a very good understanding of the terminology and the motivations as you progress.