What are the most important terms to include in a fundraising agreement?

1 Type of investment

The type of investment refers to the form and structure of the capital that the investor provides to the fundraiser. It can be equity, debt, convertible notes, SAFE, or a combination of these. Each type of investment has its own advantages and disadvantages, depending on the stage, valuation, and goals of the fundraiser. You should carefully consider the implications of each type of investment, and choose the one that best suits your needs and expectations.

2 Valuation and price

The valuation and price terms determine the value of the fundraiser's company and the amount of equity that the investor receives in exchange for their capital. Valuation can be pre-money or post-money, depending on whether it includes or excludes the investment amount. Price can be fixed or variable, depending on whether it is determined at the time of the agreement or at a later date. You should negotiate a fair and realistic valuation and price that reflects your company's potential and growth, and aligns with the market conditions and the investor's expectations.

3 Dilution and anti-dilution

Dilution and anti-dilution terms affect how the ownership and control of the fundraiser's company change over time, as new shares are issued or existing shares are transferred. Dilution occurs when the percentage of equity that the investor holds decreases due to new share issuances. Anti-dilution protects the investor from dilution by adjusting the price or number of shares that they own, based on certain triggers or formulas. You should balance the trade-off between dilution and anti-dilution, and ensure that you retain enough equity and voting power to run your company effectively.

4 Liquidation preference and participation

Liquidation preference and participation terms define how the proceeds from a sale, merger, or dissolution of the fundraiser's company are distributed among the shareholders. Liquidation preference gives the investor the right to receive a certain amount of money before the common shareholders, in case of a liquidation event. Participation allows the investor to participate in the remaining proceeds, after receiving their liquidation preference, along with the common shareholders. You should understand the impact of liquidation preference and participation on your payout and incentives, and negotiate them accordingly.

5 Vesting and clawback

Vesting and clawback terms regulate how the equity that the fundraiser and their team receive is earned and retained over time. Vesting means that the equity is granted gradually, based on certain milestones or time periods, rather than upfront. Clawback means that the equity can be reclaimed or forfeited, based on certain conditions or events, such as termination, resignation, or breach of contract. You should establish reasonable and fair vesting and clawback terms that motivate and reward your team, and protect your company from losing valuable talent or assets.

6 Governance and information rights

Governance and information rights terms specify how the investor influences and monitors the decisions and performance of the fundraiser's company. Governance rights include board representation, voting rights, consent rights, and veto rights, which give the investor a say in the strategic and operational matters of the company. Information rights include reporting rights, inspection rights, and audit rights, which give the investor access to the financial and operational data and records of the company. You should respect the investor's interest and involvement in your company, but also maintain your autonomy and confidentiality.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?