Business is all about money. That is why, every single penny, every little investment matters a lot in case of business. However, there is no denying of the fact that business investment can be a little risky too. That is why, it is extremely necessary to take note of every little detail written on the contract. No matter how boring and tedious the work of going through the details might seem, one should not especially miss these points-
- Framework of the Investment:
It is of utmost importance to notice the type of investment offered up in front of you. Typically, there are two types of investors- equity investors and debt security investors. Equity investors only get money if the business they are investing in are making any profit. On the other hand, in case of a debt security investor, one must have to pay the money back on a regular basis no matter the situation. In case of a small business owner, the idea of debt security investment might not be too good because of the initial risks every business faces. In case if one needs to accept a debt security investment, they should notice the terms very carefully.
- Types of shares:
In case of an equity investment, the investor becomes the shareholder of the company. Now the next thing to notice is the type of shares that the investor is asking for. There are two types of share- preferred and common. In case, if the deal is made on the basis of common shares, then the owners gets equal right and say with the investor- in terms of profit and decision making process. However, in case of preferred shares the rule book is different and the investor gets a higher authority. So, this thing should be noticed carefully.
- Stay clear about the anti-dilution protection:
As mentioned before, in case of equity investment, the investor owns a particular percentage of the total number of shares. In future, if the owner decides to distribute more shares at a discounted price, the percentage of share of the investor might decrease. Here comes the issue of anti-dilution clause. It is almost impossible to avoid having this clause on the contract. However, what one can do is negotiate for a “partial ratchet”. In this negotiation, the original investor gets to buy the shares at a discounted rate too in such situation. However, the rate should be closer to the market value. In this way, the well-being of the owner stays intact.
- Process of liquidation:
The terms of liquidation should be discussed clearly and there should be clear idea about who gets paid in what ratio. Typically, the investors include the clauses of double and triple dip in a contract. In such scenario, they get more money than even the founder. So, this clause should be negotiated properly before making any decision.
Because of the desperate need of money, the founders almost agree to anything. However, ignoring important terms like these might lead to serious future problems for the company.