Venture Capital Agreement Considerations
A Venture Capital Agreement is a contract between you and your investors. It is an exciting time; there are few things that are more rewarding than knowing that you have built something that others are interested in so much that they are willing to give their money so that you can build your dream. At this financing stage, your company is probably new and presents a relatively high risk for your investors. Therefore, the investors will want to reduce their risk in their investment. The Venture Capital Agreement outlines the terms under which the investors will invest. The following are important considerations that you need to think through very carefully before you present the Venture Capital Agreement to your investors:
- What type of stock or shares are you selling?
- Will the investor receive voting rights and be able to make decisions in your company?
- How will you determine the value of your stock or shares? Will you have an appraiser? Will the investor have its own appraiser? Will you use Kelly Blue Book values for certain physical assets?
- Will you disclose certain financial and historical data? If so, how much will you disclose?
- Will you use GAAP to do your books?
- Will the books be audited before you present them to your investors?
- How much involvement will the investor have in your company?
- Who will manage the company?
- How many shareholders total will you have?
- Will the investor receive dividends? If they will receive dividends, how much will they receive and when?
- Will the investor receive options to purchase the entire company down the line?
- If someone wants out from your business, will you have the right of first refusal? The right of first refusal means that before someone sells their shares to an unrelated third party, they must give you and/or the business the option to purchase the shares first.
- Do you have Intellectual Property? If so, who will be the owner of the Intellectual Property?
- Will you have the investor sign a Confidentiality Agreement? Remember that before investing, the investor will most likely look at your books, customer lists, and other confidential information that you want to keep secret from your competitors.
- Will you have an anti-dilution provision? Anti-dilution means that even if new members or shareholders are added to your company, your number of shares will not decline.
- Who will be paying for due diligence performed by the investor?
If you have the answers to these questions, it will make the process of finding an investor and writing the Venture Capital Agreement much easier and smoother. Even though there will always be some back and forth with potential investors, showing them that you have thought about this and that you know the answers will also give you a leg up in protecting your company instead of just agreeing to everything that the investor wants. Best of luck!
Donata Kalnenaite, Esq.