Basic terms and documents in any venture capital transaction
Businesses seek investment primarily to drive growth. Securing investor funding allows you to scale operations, enter new markets, develop new products, and attract top talent. But effectively asking investors for funding involves more than simply stating your financial needs; you must clearly present your request through well-prepared investor documents.
Fundraising can be complex and stressful, involving detailed negotiations, specific terms and conditions, and careful management of ownership structures. Knowing the necessary investor documents at each stage can significantly simplify the process, preventing costly mistakes and ensuring favorable terms.
Essential Investor Documents and Their Key Components
Term Sheet
A term sheet outlines the preliminary terms for investment and serves as a framework for detailed negotiations. Key elements include:
Valuation and investment amount: Defines pre-money and post-money valuations and the total funding sought.
Equity type: Specifies whether the investment involves common stock, preferred stock, or convertible notes.
Liquidation preference: Ensures investors can recoup their initial investment in case of an exit event.
Voting rights and board composition: Establishes investors' involvement in key company decisions.
Anti-dilution provisions: Protects investors from dilution in subsequent funding rounds.
Conditions precedent: Lists necessary conditions for the investment's completion, such as due diligence and regulatory approvals.
Shareholders’ Agreement
A long-term contract among shareholders outlining their rights and responsibilities. Key provisions include:
Transfer rights: Rules for selling or transferring shares.
Minority shareholder protection: Safeguards the interests of smaller shareholders.
Governance and voting: Procedures for making major decisions and voting processes.
Cap Table
A cap table clearly demonstrates equity distribution among shareholders, tracking shares, stock options, convertible notes, and more. Critical aspects include:
Shareholder names and ownership percentages.
Types of equity owned by each shareholder.
Potential dilutive impacts from future equity issuances.
Subscription Agreement
This document formalizes investors’ purchase of shares during a funding round, outlining:
Offer details: Specifics about the type and number of shares issued.
Investor commitments: Investors' agreement to adhere to the terms.
Company assurances: Guarantees about the accuracy and validity of company statements and issued shares.
Investor Rights Agreement
Details privileges and protections granted to investors, typically including:
Information rights: Investors' access to financial records and business information.
Pre-emptive rights: Allow investors to maintain their ownership percentage in future funding rounds.
Registration rights: Facilitate investors’ ability to sell shares publicly.
Due Diligence Documents
Critical documents provided during the due diligence process to verify business claims made in investor presentations, including:
Financial statements and projections.
Legal compliance and patent information.
Market research supporting your business model.
Additional Important Investor Documents
Investment teaser (one-pager): Briefly introduces your business to potential investors, covering the problem, solution, market opportunity, business model, and traction.
Pitch deck: Comprehensive multi-slide presentation delivered to investors, typically covering the problem, solution, market opportunity, business model, traction, competitive advantage, financials, team, and funding needs.
Final Tips for Securing Investment
To successfully navigate the fundraising process and secure investment, consider these best practices:
Maintain an accurate, organized cap table for clarity on ownership and equity distribution.
Ensure accuracy and transparency in all provided information to build investor trust.
Have legal experts review all investment documents to mitigate risks.
Maintain regular, transparent communication with investors after funding.
