Entrepreneurship · Entrepreneur

What clauses protecting startup investors are unfair for founders?

Sam Lepak Internet Marketer I Social Media Expert I Professional Learner I Student Entrepreneur

October 3rd, 2016

I am asking about clauses that you will find on equity offerings as on SAFEs and convertible notes it is pretty straight forward.
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Don Ross Managing Partner Digital Health at Life Science Angels

October 3rd, 2016

As an early stage investor for more than 15 years, here are a few points to consider:
(1) I strongly prefer negotiating a priced equity round. This is the most fair for both investors and entrepreneur. Negotiating a valuation is the first test whether the entrepreneur and I will be a good match. Investing in a startup is the beginning of a long term relationship. Life is too short to spend time on a poor match, which will be costly personally and financially for both sides.
(2) Will do convertible notes on occasion. The valuation cap should be based on TODAY'S valuation when money is being invested. 
(3) SAFE docs are a non-starter. Only appropriate for earliest stages (friends and family round), not professional investors.
(4) Royalty-based returns can work in special cases. Important points: (a) the business must have high margins that can withstand the drain on operating cash flow, and (b) investors should avoid taking investment risk for lender sized returns.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 3rd, 2016

You should assume that investors are not going to put a document in front of you that does not favor your interests. The first question you need to ask yourself is how bad do you want the money?  From there you can negotiate terms. If you have never done it, I strongly suggest that you hire a lawyer who has negotiated with investors before.

Dane Madsen Organizational and Operational Strategy Consultant

October 3rd, 2016

Watch for anti-dilution clauses, Board control for minority investment, preference returns in general, but particularly if there is a multiple return prior to payouts a cap (in order to have a preferred return, make them cap it at 3x or they have to convert), super majority of a Class approval to add another class or shareholder, and Preferreds accruing a dividend just to name a few.  You are way better off having a good corporate lawyer experienced in startups work with you on these than trying to catch them yourself. 

Aleksey Klempner

October 3rd, 2016

Vesting schedule :)

Joe O'Neill Financial Advisor at Great Rok Pte, Ltd

October 3rd, 2016

I can send you a template of a typical convertible if you wish.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 3rd, 2016

The whole concept of investors holding equity in a company into which they are only buying in order to sell out is conflicted with the founders. Royalties avoid the conflict always present between the investors in ownership and entrepreneurs wishing to build a lasting business. If the entrepreneur is essentially creating an intended flipper it makes less difference.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 3rd, 2016

These are all the normal problems when the unsophisticated entrepreneur attempts to get money from a VC or other shark. Investors in equity are only prompted by the possibility of selling what they bought at a big profit, regardless of the returns for the founders. Using royalties, the investors hold zero equity and are only betting on revenues increasing. Arthur