What should I include in an investor provisions summary?

David S. Rose
David S. Rose , Founder and CEO , GUST INC.
22 May 2014

Original question on Quora:
“I was asked to summarize the provisions of the operating agreement that an angel investor would want to know prior to (or at) the term sheet stage. What should I include (or what should I exclude, given that on first pass I have 8 pages excerpted from the operating agreement)?”

From the question it sounds to me as though this is a case of both a novice investor and a novice entrepreneur, with neither one having much experience with or as an angel. I would therefore *strongly* advise you to get an experienced startup attorney to advise you during the negotiation/term sheet discussions.

Here are some thoughts that immediately come to mind:

1) The only types of US companies that have “Operating Agreements” are Limited Liability Companies (LLCs), and this structure is very difficult to use for (a) raising money, (b) issuing options, and (c) governance once things begin to get complicated. It’s not impossible, but it’s certainly not preferable. That’s why 90%+ of funded US startups are C corporations.

2) Knowledge of the types of things that would be in an Operating Agreement tend to be binary: either you’re willing only to provide the most basic summary  (“Management of the company is controlled by John Doe”) or else you’re willing (possibly under NDA during due diligence) to give them the actual Operating Agreement to read for themselves. Providing an 8-page summary makes no sense.

3) A Term Sheet is *prospective*, setting forth the future structure under which a potential investor *would* invest. As such, it doesn’t matter what the current Operating Agreement says, because it will simply be changed prior to closing to reflect whatever new provisions the parties agree on.

Bottom line: time to find an attorney (you’ll need one to draft/negotiate the actual closing documents, so you might as well start now!)

*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.