Well, you have made a cool startup and attract money from the investor. Save yourself this post and you will have a checklist of what to look for.
1. Equity investment in the company's capital. This is the most common way to formalize relations with investors. Founders, remember, the share in the company (Equity) is your most expensive asset. Do not think that by attracting money to the project through the sale of a part of the company, you make a very profitable deal. It is beneficial for you only in one case when the investor gives more value than you and the team would do yourself. If the company grows 10 times in 3–6 months, including through connections or experience in the industry, and the next stage helps to properly attract the next round of investment (SMART Investor). There are two options for raising money in the capital (in fact, at an early stage it is almost always the same):
- Cash-in. In this case, the investor acquires a share in the company through an increase in the authorized capital and becomes a full owner of the share in the company.
Example: we invest 1 million rubles in the project according to the company's estimate of 10 million rubles. The investor will make a nominal value of the share in LLC (most likely, the authorized capital will be 10K rubles, after making 1K (the nominal value of 10% of the investor's share), the authorized capital will be 11K rubles). And then, the remaining 990к received in the additional paid-in capital.
- Cash-out. Forget about this option at the beginning. If you find such an unthinking investor who wants to invest in the company in the first stages, having bought most of the shares from the founders, run away from him, he does not yet understand what he is doing. Money, which is the first version remain in the company and help it grow, in this case, just pulled the founders for their needs (and we believed that their company — it's almost all they need).
2. Investments through loan and convertible notes. A loan is not an investment because the nature of an investment is to put money into a company in order to participate in the company. The creditor, in fact, is not an investor, he just gives money at interest (in Russia it works terribly, sometimes the cost of money comes to 30–40% per annum). Keep in mind, the loan is repayable financing. The contract will prescribe all the tools for the return of funds, so if you make or sign a loan agreement, read it and agree only on the conditions that are able to cope here and now. Or, if strongly believe in the return under the terms of the contract.
- Convertible note. It is very good if you do not want to evaluate the company now. It seems that it is difficult, but in fact, everything is simple.
The core: you take the money in debt, but the lender who gave you the loan has the right to convert the debt into shares in the future when certain events occur. Almost always, the convertible loan agreement specifies the time conversion method and the discount upon conversion. This is a premium for the investor for the risk of investment. He at the time of conversion is an investor, gave you money in most likely in an empty LLC and carries risks (startups almost always have nothing to provide a loan, no tangible assets).
Investor privileges: Liquidation Preference, Anti-Dilution, Board Representation, Veto Rights, Preemptive Right Registration Rights, Redemption Rights.
Restrictions for founders: Vesting, Removal, Relocation, No–Sale, Co-Sale.
Special questions: Right of First Refusal, Bring Along.
All these, at first glance, very complex words for you should be very simple and clear BEFORE signing the contract of convertible loan.
3. You can combine. Part of the investment can be obtained through Equity and part of the loan. It seems to be working well. But you need to consider all the risks, reread 1 and 2 points.
Choosing an Investor, approach this even more scrupulously than the choice of his Wife. Wife you have on love. The investor almost always needs only profit (this is normal) and sharks-lawyers work on his side, who draw all the ways of protection on themselves, leaving a lot of risks to you (I will not talk about some market players, I read some investment documents and understand why it is so hard in our country with projects, and many top ones go abroad).