Startup investing is coming of age .
What started as a trickle , has today got more affirmation from the investing world.
The investors are willing to set aside a part of their corpus to invest in this asset class.
And with the accelerators and angel funds acting as a medium to invest , it’s good news to all founders who want to disrupt the ecosystem.
And to join the bandwagon ( if this term can be used ), the guards ( the terms of investment ) are let down .
It’s important to both the investors and the founders to know what they are entering into.
And this agreement is first inked through Term Sheet and confirmed through the Shareholder Agreement.
The early stage investors invest as they believe their capital can give multiple returns . And the founders believe that they are creating the next big product / service .
And that’s why the terms in the legal agreement needs to be understood by all the parties involved.
The early stage founders should know what they are signing when there are experienced angel investors in the cap table .
So also should the investors , when the founders are the experienced lot .
Let’s be clear- everyone is in for money.
When investing and signing, we should know the following terms –
- Rofo(Right of first offer)
- Rofr (Right of first refusal)
- Drag rights
- Tag along rights
- Liquidation Preference
- Affirmative rights
- Representation & Warranties
- Anti dilution rights
These are key ones one should not only be aware of but also know how it works.
Knowing what one is signing into is very important. This will also ensure that as and when the company grows, as an investor or founder , you get a fair deal .
Your investment could grow but with rights not in your favor or not a win-win , the investment can go south.
Buyers beware — Remember …
Not sounding pessimistic, but then it’s an interesting ecosystem out there .
Welcome…
Author:
Brijesh Damodaran
