Investors Should Always Review Venture Capital Agreements Thoroughly

Posted on: 16 July 2020

Venture capital financing for small businesses and startups can be a lucrative, long-term investment opportunity. However, just as with any investment, there are risks involved, especially when it comes to the contract agreement. If the contract agreement is one-sided and it favors the company more than it favors you as the investor — it can spell trouble. It is important to review any venture capital agreement thoroughly before moving forward with the deal.

Investor Rights

It is especially important to look over the investor rights outlined in the contract to ensure they match the terms that you originally agreed upon. The investor rights section will outline all the rights you have over the direction of the company. If you have majority rights, you may have the final say on changes to the business, and if you have minority rights, you may not even have to be notified. Make sure you are comfortable with the number of rights you will have with the business. 

Term Details

Another important area to focus on is the term details. Within this section, you will find information that lists the term for which you and the company will be in a partnership, as well as the terms of the financing structure that you will provide. Once you sign this agreement, you are obligated to meet these term dates. Therefore, any inaccuracy in this area could cost you money, so you want to ensure you are comfortable with the terms.

Business Structure Agreement

If the venture capital agreement comes along with a change to the business's structure, such as your name being listed as an official shareholder of the business, the details of the structural change need to be included within the agreement. There should also be details on how quickly these changes must be enacted, as well as how the confirmation of the transaction must be provided to you.

A Professional Eye

To ensure you are protected, it is a good idea to partner with an attorney. An attorney can review the venture capital agreement to look for any discrepancies and argue on your behalf to ensure the contract is just as favorable for you as it is the party who is benefiting from the investment. It is best not to sign or even negotiate the deal without the help of an attorney.

Make certain you review the contract carefully to ensure your interests are well-protected. Reach out to a venture funding attorney like Ian Carter or Ashley West at Carter West Law to learn more.