Terms and Conditions
The investment structure for your deal will be laid out in the closing documents. Negotiating closing documents is rarely pleasant. It’s not uncommon for the whole deal to unravel at the point where pen meets paper, because this will be your first realization that you’re going to be controlled. If you’re like most entrepreneurs, you won’t like it; unfortunately, investors tend to be control freaks too. If you can picture two rams bashing heads on the top of a hill you have the right image. If you find yourself in this position, let your lawyers fight it out so you won’t have to worry about saying things you’ll regret later. Trust us, it will be a memorable process.
Management rights and responsibilities, future financings, and the all-important issue of control are some of the critical issues you’ll be dealing with.
Contrary to popular belief your percent ownership is not what control is all about. Board seats and the terms and conditions of your deal will dictate more about who controls what than ownership percentages.
Keep in mind that conditions set in a company’s first round of financing establish an important precedent for later rounds since new investors will rarely accept a deal with terms and conditions that are any less favorable than the first round. Complicated deals, with lots of ambiguous rights to future stock will only frustrate a company’s negotiations with later investors. It’s important, therefore, to keep the first round as simple as possible, and to establish terms and conditions that will neither discourage later rounds or penalize early investors (that includes you, by the way).
There’s a complete, anotated term sheet in the Finding Money ebook, if you want an insider’s look at what they’re really all about.
