Important Terms and condition for Startups getting fund should take care

[Pradeep Pandey]

Hi Guys

One of my friend had are going to receive seed funding from the investor.

Roughly 12% equity is being given to them.

Please let me know :

1.how this equity model work.

2.Important terms and condition to be  put forward to investor

It will be very great help for me if startups who already got funded or who have knowledge would guide me.

Regards

Pradeep

[roopesh shenoy]

http://fundersandfounders.com/how-funding-works-splitting-equity/

We were lucky to have a seasoned negotiator and deal-maker in our founding team when we raised some money. Some of my personal learnings through the process. 

1. Get a good lawyer - draft your agreement with your lawyer's help, if you can (unless investor has already issued a term sheet). Good lawyers will not only do the paperwork but also advice you on terms that could hurt you down the road, terms that are unfair vs. market standard, etc. 

The lawyer needs to be paid by you and represent you - not the investor. Investor may have their own lawyer to advice them. Skimping on the lawyer fees will do you no good. 

2. Look up terms such as convertible debt or preferred shares. Generally there will have to be some downside protection for investors investing at seed stage (in form of anti-dilution for e.g.) but be careful of unfair terms (like full-ratchet). 

3. Look at terms that can threaten the company if there is a disagreement - for e.g. drag along. 

Basically, project not only the happy situation, but the in-between and the worst-case situations - and see what happens in each of these situations. 

For e.g. what happens if you have to do a down-round? What happens if you get profitable but can't raise more money? What happens if you have to sell the company for less than the valuation you're raising at now? 

You need to try and ensure that the company you're putting your heart and soul into has the best chance of survival in difficult times. 

Although your job might be to maximize your own interests, try to be as fair as possible to the investor too - think of their financial concerns in each of the above situations - see how to make sure their hard earned money is protected but without threatening your company. Draft an agreement with these points in mind (or review an existing one). 

Don't be afraid to negotiate - ask for things that really matter to you (say not having the drag term), compromise on things that are negotiable to you but matter to the investor (say valuation or basic anti-dilution). 

4. Avoid giving away a board seat if you can in early stages. 

5. Founder splits are more common than people will admit - so even though you'd prefer to have founders all working together, prepare for scenarios where one/more founders may want to quit but others want to continue. Having a founders agreement in place should help with that. 

Though not a investor related thing, it's still something important to account for when formal investment is coming in. 

Be Awesome,

Roopesh

www.makkajai.com

www.facebook.com/makkajai

www.twitter.com/makkajai

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