We have an investor interested in our start-up and we are working...

We have an investor interested in our start-up and we are working towards finalising a deal. What issues should we be considering?

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There are a number of critical steps that you now need to take to ensure that both parties are satisfied with the deal. Adrian Dommisse of Dommisse Attorneys shares this advice.

First, ask for a term sheet early. A term sheet is simply a summary of the deal in a few pages that exposes the bare bones of the fundamental commercial terms of the investment. It should be concise so you are less likely to miss some essential detail. A term sheet should give you a clear picture if you are all on the same page or not.

Before you put pen to paper on the term sheet, be sure to understand which parts are binding.

Choose wisely

Next, compare deals. Don’t be tempted (or persuaded) to commit to one investor unless they offer a genuinely better deal.

You should always check the fees. Once the investors instruct their attorneys to draft the investment documents, they will expect those fees to be for your account – usually deductable from the investment amount when it is advanced to you.

Make sure there isn’t a genuine disagreement on a fundamental term of the investment. Who pays those fees if the investment never closes? Make sure that you hash out all the details prior to signing and make sure that the legal fees are capped so that they won’t drain your investment funds.

What are the costs?

You should also determine if there are ‘arranging costs’ involved as these can be significant. If you are negotiating directly with the investor, this fee may not apply.

You could argue that the investor’s profit will be from their investment (exit profit or distribution of profit), not from the company’s balance sheet at the commencement of the relationship. Having said that, it is not uncommon for investors to take a fee from the proceeds of the investment.

Following the above process will help avoid disappointment, or even avert a failed deal later down the line, at your cost.

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