What terms to discuss with an investor before the investment

What questions should a founder discuss with an investor before the investment? Investment is a very important moment in a startup's history; it is sometimes even compared to getting married. That's why you need to approach this matter very attentively and very carefully. I advise discussing all the important questions with the investor before the investment begins. Here, in my opinion, are those questions. The first and most important question is, of course, the amount of the investment. That's always where it starts. Here it is important to agree, first, on the amount of the investment and on how it will be paid out. Sometimes an investor, having reviewed the business plan, decides there is no point in transferring the whole amount at once, because the founder won't need it right away.

So they propose splitting the total amount into several parts and paying it out as needed. It is possible that the founder will need the whole amount at once, so it is better to discuss this point right away. Next are the conditions for paying out the investment. Sometimes the investor makes payment of each subsequent tranche conditional on the founder meeting the previous KPI. That is: if you haven't done the work you were supposed to do with the first tranche, I won't give you the second tranche. That's roughly how it looks. The founder should think about this and discuss this point right away.

Next is timing. Payment deadlines need to be spelled out explicitly and written into the contract. There were several cases in my experience when funds promised founders financing and even signed some documents, but then some force majeure or unforeseen circumstances occurred, and they dragged out or even postponed the investment altogether. The founder had already taken certain actions on the strength of this promise and had even gone into some debt. This is a very unpleasant situation. That's why the timing, whether it is a one-time payment or in stages, must be discussed and written into the contract.

The next, and probably the most important and most sensitive, question to discuss is the investor's share in exchange for their investment. Figuring out what share the investor will receive for their investment most often comes down to the question of the startup's own value. Based on its value, the investor's share is easily calculated depending on the amount of investment. That's why the most heated debates between an investor and a founder are most often about the startup's value at the time of investment. If the founder and the investor just can't agree on the startup's value, there is a technique such as convertible notes or a SAFE, where the question of the startup's valuation is postponed until later.

But we will talk about these instruments later. The next important question for discussion between founders and the investor is the investor's role in management and in the life of the startup in general. Investors who come from traditional business often understand their role differently from founders. Investors think they should tell the founder how to run the business, steer them, give advice and so on, and that the founder must follow all of the investor's advice, instructions and directions. This is where misunderstandings very often arise, because the startup industry works completely differently from traditional business.

And those investors who haven't adjusted to this new way of doing things often come into conflict with startups. I will talk in a separate lesson about the degrees of investor involvement in managing a startup and how to choose the optimal level for both the startup and the investor. The next important question is reporting. Any investment implies that the founder will report to the investor in some way; there is no other way. But investors and founders often understand this reporting differently, so it needs to be discussed right away. For example, parameters such as frequency: whether it will be every month, every quarter, or every year.

What kind of reporting exactly: very detailed and in-depth, or on certain important key indicators. This needs to be agreed on from the outset. I will talk in a separate lesson about how to prepare reporting that satisfies both the investor and the founder. The next important question is the investor's status in future investment rounds. Investors often negotiate and write into the founding documents their right to buy additional shares of the company so that they are not diluted by subsequent investors. This is common practice, and it is normal; you just need to agree on it right away and write it into the founding documents.

I have a separate lesson on this. The next important question is the terms of the investor's exit from the startup. In my practice, it has often happened that the investor and the founder spent a very long time discussing how to enter the startup, how to run it and so on, but even the investor often forgets that their main goal is not to enter the startup but to exit it, to make an exit, and to do so with maximum profit, with the so-called x multiples. That's why it is best to agree right away on how to arrange all this and how to do it so that it is beneficial for both sides. And I have a separate lesson on how to do that.