Once the negotiations of the term sheet have been concluded and the key commercial terms of the investment have been agreed upon, the next important step is to put it all down on paper in the form of a formal, legal and enforceable agreement, which all parties need to sign. This is called an investment agreement, a shareholder agreement, or a Sale and Purchase (S&P) agreement.

The S&P agreement is a very important document that will govern the way each shareholder will behave by spelling out the rights of each party and what one party can do to another, so do not take this lightly. If you don’t pay attention to the details, I guarantee it will come back and bite you when you least want it to, whether things go better than planned or when everything starts to fall apart.

While you should take care of all the usual legal issues, be careful not to make the agreement too precise too quickly. Take your time in opening up all the issues, start by covering the general issues then breaking down into the details in future meetings. This gives you more time to understand and work on the whole agreement.

The more issues you open up during the discussions of the final agreement, the tighter the agreement becomes. Always remember, the investors or VCs are not there to help you, but to protect their own interests, so it is important to understand that the there will never be a balanced agreement. It is wise to start from a position where it looks like the investors will take care of themselves, even if it is at your expense. Start by thinking that they will go all out to create a one-sided agreement that only takes care of their interests. So you too must make it as one-sided as possible in favour of yourself. From there both parties should work towards a middle compromise. It is strongly recommended, actually a must to engage a lawyer to help you with the negotiations.

Make sure your lawyer clearly knows what your expectations and hot buttons are, and to help you defend your interests at all cost.

Getting on the Negotiation Table
Start negotiations with lawyers from both parties. Let the lawyers do as much as possible without involving yourself, the investor, or the VC. Ask the lawyers to distill a list of unresolved issues that they could not nail down during the lawyer-to-lawyer meetings. Once the lawyers are done with round one (and there will be plenty many more rounds), the list of outstanding issues that they could not resolve should be highlighted to all the parties.

The next step is to arrange for a four-way meeting between you (your team), the VC/Investor and both lawyers, to resolve the issues from the first meeting. Be prepared for a ‘locked room’ marathon meeting, as it will take a while to trash out all the issues. If anything cannot be resolved, it should be distilled or put into a “parking lot”. This list of unresolved issues will now be much smaller than the original list.

These unresolved issues should then be taken up separately in another meeting without the lawyers present. Always remember that a business is flexible and you are dealing with a human being on the other end. Both parties should come together to talk business and how they could resolve the issues with some flexibility. Be prepared to ‘Lose some and Win Some.’

At this stage, if the top persons from both sides cannot agree, then of course, there will be a lot of trouble. The process may drag, but at the end of the day, you must ensure you have some room to move, if not, then it will be very difficult to close a deal. Remember that this deal does not end when you get the money, but that’s when it starts, and if you want to build a long term business and relationship, you will have to have some flexibility.

One thing I have always found very useful to have is a bag of “goodies”, which may not be worth much to you but which you can show yourself as willing to give up as a sign of your flexibility for the sake of getting the deal done. By giving some of these “goodies” away, you can make the other party feel as if they have gotten a good deal. But whatever you do, do not give the “house” away, because if you do, the whole experience of running the company could be painful as you will always feel you gave away too much, leaving yourself with too little incentives to sacrifice yourself for the company.

Once the issues have been resolved and an acceptable agreement has been reached, both parties should send it to their respective lawyers, instructing them to just follow what has been agreed upon and convert the agreement into the necessary legal jargon for the final agreement.

Keeping Legal Costs Low
If you do not reign in your lawyers, the legal costs can be very high. Remember that lawyers charge by billable hours. Ensure that you keep a tight control of both the process and what your lawyers do, as they have a tendency of going to certain extremes as a means to show their client how well they are taking care of their clients’ interests.

It is good to have a strong legal council who understands business very well, but the problem is that the lawyers often get involved in the commercial issues, which they should not be getting into. The commercial terms should be fully controlled by the entrepreneurs and the investors, while the lawyers’ job is to fit the commercial issues and commercial terms into a legal framework. Whenever the lawyers stray into the commercial areas, the clients should intervene to instill discipline into their lawyers.

Always Enforce Quality Control…ALWAYS!!!
Finally, it is important that at least one, if not all members of your team understand and have the patience to plough through all the words and paperwork being generated during this part of the process. If not, you will not realize the type of commitments you might have made in signing a potentially onerous agreement.

Is this the end? Of course not! Now that you have gotten the money in, the company can start operating full steam ahead, and now the attention shifts to the part of execution. This entails another series of tough tasks the entrepreneur has to do – the operational and technical aspects of running the company, which is another big part of transforming the idea into a business. First, you transformed your idea into a plan, and then into a business plan, and lastly, into a company ready to run. Now, you get to see if you did a good job in making that transformation.

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