What are the most important clauses in term sheets and contracts for small business fundraising?

In addition to valuation and dilution, it's essential to pay attention to the terms related to governance and control. Review the voting rights, board composition, and decision-making processes outlined in the term sheet or contract. Ensure that they align with your vision for the company and that you have a say in critical decisions. Moreover, consider clauses regarding exit strategies, such as buy-sell agreements or drag-along rights, which can impact your ability to exit the business in the future. It's crucial to strike a balance between attracting investors and safeguarding your interests.

In addition to dilution effects, consider anti-dilution provisions to protect future investors from diluting their ownership rights in future financing rounds.

In addition to liquidation preference and participation, pay attention to protective provisions. These clauses outline certain actions or decisions that require investor approval, potentially affecting your operational freedom. Ensure that these provisions strike a fair balance between protecting the investors' interests and allowing you to run the business effectively. Negotiate thresholds and specific triggers to avoid unnecessary restrictions. A well-balanced term sheet is crucial for a successful and mutually beneficial fundraising process.

Term sheets and contracts should outline the rights and responsibilities of both the founders and investors in decision-making. Understand the voting rights, board composition, and any protective provisions that may impact your ability to manage the company. Negotiate for a fair balance of control that aligns with your long-term vision for the business while also addressing the concerns of your investors. This ensures a harmonious working relationship and avoids conflicts down the road.

A well-defined process for resolving conflicts between parties is crucial. It can save time and legal costs by stipulating arbitration, mediation, or other dispute resolution methods. Ensure the mechanism is fair and impartial to protect your interests.

It's essential to focus on dispute resolution and termination clauses in fundraising contracts. These clauses outline the process for resolving conflicts and provide clarity on when and how the agreement can be terminated. However, legal documents can be complex, so seeking expert advice is a smart practice to ensure you fully comprehend and customize the terms to align with your business's unique requirements and goals.

You should be able to explain the use of funds briefly. Investors always want to know how the money will be used. They want to ensure that the use aligns with their business expectations and that they are not simply funding your salary, or a lavish lifestyle. It also shows them that you have been strategic and thoughtful about your priorities and using the investment for future growth.

Contracts are infinitely varied in length, terms, and complexity. Yet, all contracts must contain these essential elements. 1. Offer—What specifically is being proposed? 2. Acceptance—Do all parties agree? 3. Awareness/Intention—Are the parties interested in working together? 4. Certainty—Is the contract clear and understandable? 5. Consideration—How does each party benefit? 6. Capacity—Can all parties legally enter an agreement—abilities, soundness of mind, authority to act, etc? 7. Legality—What laws apply? When these elements of a contract are present, the agreement is much more likely to be enforceable, if one of the parties fails to perform as agreed.