After 13 years of investing, I’ve seen too many founders lose their companies,
All because they didn’t understand the agreement they had with their investors.
Here are 9 key terms you must know to avoid losing everything you've worked for:
All because they didn’t understand the agreement they had with their investors.
Here are 9 key terms you must know to avoid losing everything you've worked for:
Founders offer terms to make their business more attractive to investors.
But you need to find the right balance between attractiveness and risk.
Once you know the impact of these terms, you'll be able to craft the perfect deal for both you AND the investor.
But you need to find the right balance between attractiveness and risk.
Once you know the impact of these terms, you'll be able to craft the perfect deal for both you AND the investor.
• Valuation & Investment
How much you raise and the valuation you raise at, will determine how much ownership an investor will have.
The more you raise at a cheaper price, the less ownership (and control) you end up having.
Don't raise more than you have to.
How much you raise and the valuation you raise at, will determine how much ownership an investor will have.
The more you raise at a cheaper price, the less ownership (and control) you end up having.
Don't raise more than you have to.
• Voting Rights
An investor's ownership stake will determine how much control they can exert on your business.
Be careful of giving away majority voting rights.
This could result in the majority shareholder taking action that you may not support.
An investor's ownership stake will determine how much control they can exert on your business.
Be careful of giving away majority voting rights.
This could result in the majority shareholder taking action that you may not support.
• Non-Disclosure
Investors will get access to sensitive information about your business.
They could share that information and negatively impact your business.
Secure your IP and protect yourself with a strong non-disclosure agreement.
Investors will get access to sensitive information about your business.
They could share that information and negatively impact your business.
Secure your IP and protect yourself with a strong non-disclosure agreement.
• Liquidation Preference
This right enables investors to receive the proceeds of a sale before anyone else.
This is attractive because it gives
them good downside protection.
If things go south, they could end up with their money back and you might be left with nothing.
This right enables investors to receive the proceeds of a sale before anyone else.
This is attractive because it gives
them good downside protection.
If things go south, they could end up with their money back and you might be left with nothing.
• Drag Along Rights
This allows the majority shareholder to FORCE a minority shareholder to join in the sale.
If you're not the majority, your investors could force you to sell your stake in the business even if you don't want to.
This allows the majority shareholder to FORCE a minority shareholder to join in the sale.
If you're not the majority, your investors could force you to sell your stake in the business even if you don't want to.
• Tag Along Rights
If a majority shareholder sells their stake, this allows the minority shareholder to join the sale if they want to.
This will allow you to choose between staying with a new investor or leaving with the outgoing investor.
Get this right if you're a minority.
If a majority shareholder sells their stake, this allows the minority shareholder to join the sale if they want to.
This will allow you to choose between staying with a new investor or leaving with the outgoing investor.
Get this right if you're a minority.
• Rights To Future Investment
This gives priority to an existing investor for any future investments.
This isn't ideal if you plan to bring in new investors in the future.
Nobody wants to spend resources doing due diligence to then be rejected for an existing shareholder.
This gives priority to an existing investor for any future investments.
This isn't ideal if you plan to bring in new investors in the future.
Nobody wants to spend resources doing due diligence to then be rejected for an existing shareholder.
• Anti-Dilution Rights
This protects the investor from future events that could dilute their existing investment in the company.
However, this impacts other shareholders (you) because their ownership stake will be disproportionately diluted.
Best avoided.
This protects the investor from future events that could dilute their existing investment in the company.
However, this impacts other shareholders (you) because their ownership stake will be disproportionately diluted.
Best avoided.
• Employee Stock Ownership Plan (ESOP)
If you have an ESOP or are planning to have one,
Ensure you have agreement on how this will affect the valuation.
Nothing worse than reaching an agreement on price only to realize the investor didn't factor in the ESOP.
If you have an ESOP or are planning to have one,
Ensure you have agreement on how this will affect the valuation.
Nothing worse than reaching an agreement on price only to realize the investor didn't factor in the ESOP.
TL;DR
9 key terms you need to know before getting an investor:
Voting Rights
Non-Disclosure
Tag Along Rights
Drag Along Rights
Anti-Dilution Rights
Liquidation Preference
Valuation & Investment
Rights To Future Investment
Employee Stock Ownership Plan (ESOP)
9 key terms you need to know before getting an investor:
Voting Rights
Non-Disclosure
Tag Along Rights
Drag Along Rights
Anti-Dilution Rights
Liquidation Preference
Valuation & Investment
Rights To Future Investment
Employee Stock Ownership Plan (ESOP)
That's a wrap!
If you enjoyed this thread:
1. Follow me @itsnivt to learn how to scale your business fast and get funded.
2. RT the tweet below to share this thread with your audience
If you enjoyed this thread:
1. Follow me @itsnivt to learn how to scale your business fast and get funded.
2. RT the tweet below to share this thread with your audience
Loading suggestions...