8 Questions Entrepreneurs Ask About Venture Capital Agreements
What does a venture capital agreement generally entail?
What entrepreneurs want to know about venture capital agreements
There are three critical areas of venture capital agreements that involve the kind of investment-whether it’s equity or convertible notes, how much the company is worth, and what the rights of investors are.
What’s the difference between preferred stock and common stock?
Investors usually receive preferred stock with certain rights such as liquidation preferences, whereas entrepreneurs and employees typically have common stock. Entrepreneurs often ask about the implications of each type of stock.
What are liquidation preferences, and how do they work?
Entrepreneurs are often concerned about liquidation preferences, which determine the order and amount of payouts in case of an exit (e.g., acquisition, IPO). They want to understand how these preferences affect their potential returns.
What control rights do venture capitalists have in the company?
VCS may seek board seats, voting rights, and veto power on critical decisions. Entrepreneur wants to know how much they would be losing and what kinds of decisions will be taken subject to approval.
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How is founder stock vested and why is that so?
It’s also common in venture agreements to include a vesting schedule for founder stock, which means that founders earn their shares over time. This is another thing an entrepreneur may be curious about how it impacts the ability to leave the company or sell their shares.
What are anti-dilution provisions and how do they impact me as a founder?
Anti-dilution provisions protect investors from dilution in future funding rounds, but they can be unfavorable to founders. Entrepreneurs may ask how these provisions are structured and how they might affect their ownership stake.
What happens if my startup doesn’t meet its performance milestones?
This time, venture capitalists may set milestone requirements that should be met if the startup seeks additional funding. Otherwise, such a startup incurs penalties and loses some interest. Entrepreneurs may request what happens when they fail to meet these set expectations.
How are the exit strategies going to affect me, the founder?
Entrepreneurs are concerned about how the VC agreement impacts potential exit strategies, such as an acquisition or IPO, and how the timing and terms of these exits will affect their compensation and control over the company.