Things To Watch Out For When Accepting Outside Investment – Part 2

This is the second part of the article that introduces some of the most important contract terms to be mindful about when negotiating an agreement with an investor.

Exclusivity terms

An investment agreement is usually for one year, but it can be extended by mutual consent. This is the legal term for a startup founder’s exclusive right to use the investor’s money in the period of time specified. This exclusivity period is important because it is the only time period in which the investor can direct the startup. As a result, it can affect your own control over the business’s development and ability to make decisions for the business. The “exclusivity” clause is also called a “no-shop” since in this time period, you are not allowed to shop around with other investors after the signing of the term sheet. 

This is a very common practice and also makes sense from the perspective of an investor. Exclusivity clauses can be found in all term sheets. But there is a problem: Until the first investor closes the agreement, your company is off the market. This is why you need to be absolutely sure about your investors intentions.

What are the investor’s obligations?

A good question to ask yourself is what your investor’s obligations are and how you could benefit from these. According to David Wilmot, the founder of Wilmot Consulting Group, a respected advisor to entrepreneurs and investors in the fields of finance, marketing and sales, investors enter into an agreement when they want to benefit from your business. This is basically what the agreement terms will make sure for the investor: Profit. The agreement dictates the investment terms, the use of proceeds, and most importantly, the investor’s responsibilities. It is also crucially important to think about what your obligations are as an entrepreneur to the investor? Before you proceed with negotiating a deal, it is important to understand your company’s obligations.

What are the investor’s rights?

Before signing an agreement with an investor, remember that you are agreeing to a series of terms and conditions. And in all of the legal documents you will soon have in your possession, make sure you see this section highlighted. As the founder of the company, you are not only selling something of value, but you are also giving a long-term partner the ability to either: Follow you, fix the mistakes you make, or be the company who replaces you. If you fail or the business struggles to gain traction, you can sell your stake to them for shares in the company at the time of a subsequent exit. They can effectively buy you out of the business with a purchase option. They may also be entitled to take seats on the board.

Final words

To start accepting outside investment, decide on the business model and how to sell your product. Then negotiate with the investors and trust your judgment. The bottom line is to make sure that both parties are doing the best thing for the company and that the investor is genuinely confident in your ability to grow the business.

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