What are some sneaky clauses that I should watch out for in offering documents?
Attended Sarhad University of Science and Information Technology (NTI)
September 17th, 2016
This are the type of clause that investors that are not aligned with entrepreneurs like to introduce inside of offering documents. Some of these clauses may not mean anything today but down the line they could push you out of the company without a say in the matter.
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Independent Venture Capital & Private Equity Professional
September 17th, 2016
Offering documents are originated and drafted by "issuers" - that is to say "entrepreneurs" - and therefore entrepreneurs are in control of their phrases. It is not the offering document that is the source of "sneaky clauses", it is the text of the preferred stock agreement or the changes negotiated to the LLC operating agreement that could contain objectionable clauses. I advocate the use of an experienced securities lawyer to help with drafting and negotiating such documents.
Also, most jurisdictions have enacted laws that protect shareholders from certain abuses, although I would still be careful.
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Investors demand certain rights for themselves when negotiating an investment, such as drag along rights, clawbacks, rights of refusal on a potential sale, liquidation preferences, and some others I'm not recalling offhand (last time I spoke to an investor was 2013; I've bootstrapped all of my ventures since a prior acquisition, so my knowledge may be a bit dated). Most deal with control over potential exits; they of course have an interest in this (you should too, since it's when your business actually becomes worth something). I've never seen an investor demand control over officer appointments except by virtue of the board seat(s) that many ask for. It isn't usually in their interest to kick a founder they invested in off of the team unless there are clear problems that the rest of the team is likely to recognize before the investor does.
Board Member, Corporate Finance Advisor and Strategy Consultant
September 18th, 2016
They're not "sneaky," they're right there in black and white. Investors want certain terms in exchange for their investment. If you don't like the terms, don't take their money.