As a lawyer, which is engaged in design for startups and venture funding, I have to participate in negotiations on the side of the investor, and startup. It happens that the negotiations fail and the closing of the transaction is not possible, sometimes the investor doesn’t like the project team or the project as a business, but sometimes a deal can’t be closed and because of errors made by the parties.
In this article we’ll talk about the mistakes on the side of startups.
I believe that there are four key principles, for violations which mistakes are made most often:
1. The negotiations on attraction of investments should be carefully prepared.2. The negotiation process must be formalized.3. Information about the start should be clear and complete.4. The transaction should close quickly.
Now error. To negotiate a term sheet without a roadmap and deals
In my subjective opinion, the absolute most Ukrainian startups are not ready to give a clear answer to the question of the investor: “What do you suggest we do?”. The founders are ready to talk about product, team, future assessment, or revenue, but have no ready suggestions.
The best form of such proposal, the investor may be a term sheet on one or two pages, which reveals basic information, in particular: (a) project evaluation, (b) required investment, (C) the minimum investment amount and conditions of payment by installments, if it is possible, (d) the mechanism of investment — corporate law, loan, etc. (d) protective rights and other bonuses for the investor, a seat on the Board of Directors (the Board of Directors can be done in the usual Ukrainian OOO), (d) other information.
Term sheet to be a better cook with a lawyer. You need to understand that this document does not replace the pitch deck, financial or a business plan, but its presence shows that the startup team has a clear understanding of what they want to obtain from the investor and what you can offer. To continue negotiations, the investor must either agree with the Term sheet and sign it or make a counter offer.
Separately the startup team from the beginning should be the vision of the scenario of the negotiations and the closing process, which should be followed. Neglect of formalities
In continuation of the ideas about the roadmap of the negotiation process and the transaction overall will add that each stage of negotiations should be accompanied by the documents, for example, you should start with NDA and Term sheet; after a preliminary agreement reached and the planned closing of the transaction, it can be stated in the Memorandum or the investment agreement. In the preparation and approval of the above documents can be manifested problem areas and issues that need to be addressed, and the sooner, the better. The formalization of the negotiation process disciplinary side. The startup team may seem that they are in talks about investment and the result will be that the investor is not even willing to sign a term sheet or letter of intent. Do not give full information about the product, technology
I don’t want to say that a startup may not be know-how or core technologies, which should not talking left and right, but the startup team must understand that the investor may want to delve into the essence, and in this case should be the strategy in relation to investor. The worst and, unfortunately, not rare response of the startup founders that leads to a negotiation impasse: “do Not say, because you can opt to invest in and just steal the technology”. You need to understand that often the investor easier and faster to invest — buy the business or technology than to develop a similar project on their own. To prepare for due diligence
To negotiate with the investor the startup team needs to come out with the complete package of documents for due diligence.
Of course, you can obtain a list of documents of interest to the investor, to begin to collect them, to issue retroactively, missing documents, etc. But this is, firstly, a waste of time, and we remember that the transaction needs to close quickly, and secondly, it looks not very serious and reduces the rating of a startup in the eyes of the investor.
Package for due diligence may include (a) corporate documents, information about the founders, the Directors, (b) team information, (b) the package has been signed with all employees, contractors, NDA’s and contracts on transfer of rights, (g) information about all major transactions and important events, (d) applications, patents, certificates for intellectual property rights, (e) information about other investors, (e) the option plans, (g) “conceptual” memoranda, receipts between the founders and other investors shareholder agreement, (h) financial information — statement of profit and loss (P&L) statement of cash flow (cash flow), balance, (and) other documents.
Separately, the investor may insist on technical due-diligence — this, too, need to be ready. To coordinate legal aspects of the transaction without a lawyer
Variants of this error several. Often have to see the next picture — the founder of a startup yourself negotiating with the lawyer of the investor and, due to the lack of necessary expertise or readily agrees to all conditions/changes, including critical for a startup or wrongly rests against any changes, driving the negotiations to a standstill.
Bad scheme, in which the founder of a startup to consult with his lawyer, but the negotiations with the lawyer of the investor conducts itself — in this approach, the founder of a startup is linked to the preliminary instructions and, again, often wrongly rests against any changes and counter-offers.
Ideally, the legal aspects of the transaction should be agreed only between the lawyers of the parties.