Structuring an investment deal properly is crucial for both investors and entrepreneurs. There are several key factors to consider when structuring an investment deal, including investment amount, valuation, share structure, liquidation preferences, voting rights, information rights, and other legal protections. Generally, the process involves determining the investment terms, performing due diligence, negotiating and drafting investment documents, securing approvals, and completing the investment. To structure a mutually beneficial deal, both sides need to understand each other’s motivations and constraints. With proper planning and compromise, a well-structured deal can lead to a win-win outcome.
Determine the key investment terms
The first step is to agree on the key economic and control terms, including the amount of capital to be invested, the implied company valuation, and the percentage ownership stake for the investor. The valuation is typically based on methodologies like discounted cash flow analysis, comparable company multiples, or recent financing rounds. The post-money valuation should reflect expectations for future growth. Other terms like liquidation preference, dividends, voting rights, and information rights also need to be discussed upfront.
Conduct due diligence on the opportunity
Before finalizing the investment terms, the investor will conduct due diligence to verify company operations, financials, projections, technology, IP, legal compliance, and other aspects of the business. This ensures there are no major red flags. Due diligence may involve reviewing documents, site visits, customer calls, and third party assessments. Background checks on the founders are also done.
Negotiate and draft the investment agreements
Investment deals involve legally binding contracts. The term sheet summarizes the key terms already agreed upon. Legal counsels draft more detailed stock purchase agreements, voting agreements, and other legal contracts required to close the deal. Negotiating these agreements protects both parties’ interests regarding economics, controls, and exits. Experienced lawyers can preempt potential issues.
Secure necessary approvals to close the deal
The entrepreneur needs to secure any required internal or external approvals to close the deal, such as board consent or regulatory clearances. For the investor, investment committee approval is usually needed to commit capital. Closing conditions should clearly specify the necessary consents and sign-offs required from both sides before the investment is finalized.
Complete investment transfer and post-investment activities
After approvals, the investor will transfer committed funds and the company will issue the agreed shares or instruments to the investor, completing the investment. Post-investment, the investor may take a board seat and work closely with management. Structuring ongoing governance and information rights upfront ensures proper engagement after investment.
In summary, structuring an investment deal involves determining investment terms, performing due diligence, negotiating agreements, securing approvals, and completing the investment. Key considerations include valuation, share structure, liquidation preferences, voting rights, information rights, and legal protections. With adequate planning and alignment, a thoughtfully structured deal can create a win-win outcome for both investors and entrepreneurs.