If you’ve never negotiated a deal with startup investors, its hard to know if you are getting a good deal or not.
For example, this morning I wrapped up the projections for a MedTech startup that I am helping. Those projections, along with a pitch deck and term sheet, will be submitted to my investor network next week. The founding team has started businesses before, but never a high-growth startup that requires investor capital. So, they’ve had a lot of consternation about how much to ask for, how much equity to give up, and the general terms of a potential deal.
James, a client from about a month ago, was in the same shoes.
He had been offered a $100,000,000 line of credit from a private equity firm. But, he had never negotiated such a large deal and he didn’t know what questions he should be asking. I advised James to focus in on five key areas of the startup/investor relationship.
Investor Background and Experience
- How long has the firm been in business?
- How large is the fund?
- What is their due diligence process?
Strategic Alignment
- Why are they interested in your startup?
- What value is the investor offering beyond capital?
- Pre-mortem: Let’s assume that something goes wrong in our relationship. If that occurs, what happened?
Financial Terms and Offer Details
- When will a term sheet be offered?
- Is the investment from a fund or borrowed money?
- Are they asking founders to sign a personal guarantee?
Investor Expectations and Relationship
- What ROI are you looking for?
- How often do you want to receive updates? In what form?
- Is the investor syndicating the deal?
Legal and Compliance
- What legal documentation will be required for this transaction?
- What are the confidentiality requirements?
- How will potential conflicts of interest be handled?
That’s just some examples of the questions I prepared for James.
In total, there were over 50+ questions.
So, what did James do? He passed on the deal. Yep, he passed on $100M. Why? Because the investors expectations were misaligned with James’.
If you are raising capital, now or in the future, you are going to want to be armed with these fact-finding questions. They will help you avoid a bad deal.
You can get them for free by clicking the button below.
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