What are some key points to look for when reviewing an investment offer in your startup?
There are two separate and distinct sets of things that you need to look at when evaluating an offer.
The first, and most important, has to do with who the investment is from. It is impossible to over-emphasize the value of “smart money” and “good money” over “dumb money” and “evil money”. You should do at least as much diligence on your potential investor as they are doing on you. You should check references (speak with as many of their portfolio CEOs as you can, cold-calling them preferably), read everything written about them, and that they have written. Have long talks with them about what they are looking for in the relationship, what your respective ideas are when it comes to exits and long-term management of enterprise, and how much dry powder they are keeping for future follow-on investments. Above all, look for unimpeachable integrity and strong personal chemistry, so that you will both feel comfortable when there are tough decisions to be made.
Virtually every investor and serial entrepreneur I know will—in a heartbeat—take ‘smart, good’ money over ‘evil’ or ‘dumb’ money any day of the week, even if the valuations differ by 10x. Trust me, I’ve been there, done that and gotten the t-shirt.
Once you’ve settled on the investor, only then should you worry about the terms of the investment. A term sheet is not necessarily rocket science, and with enough time and effort can be understood by anyone. However, it is (or at least can be) a complicated document that you as an entrepreneur may not have seen before, but that the investor deals with daily…so the person across the table from you has huge advantage.
So start now, and help yourself by getting up to speed on what all the parts of a term sheet mean. Good resources include the great collection of posts right here on Quora on the Term Sheet board curated by Antone Johnson and the classic book Term Sheets & Valuations by Alex Wilmerding.
Good luck with reviewing your offer!
*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *
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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.