Top 3 things you should not ignore in a contract with Venture Capital investors

Percentage of ownership

The Venture Capital investors will try get best deal as they can get, that is part of their job. As an entrepreneur you must focus on how many percent of the company will be yours, remember that the optimal ownership is 50/50 some entrepreneurs have hard time to get investors and they accept what ever deal they can get without realizing the consequences of the deal. The lower the share of ownership the entrepreneur has the lower the controlling power in making decisions. 

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​Will you get the 50 percent of the money that the company was sold?

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In many cases the entrepreneur thinks they will get 50 percent of the money when the company is sold. There are some cases where entrepreneur signed a deal with 50/50 contract but they missed or ignored the part where it says 50/50 of the profit. This means that if Venture Capital investors invested $5 million and if the company was sold for $10 million then as an entrepreneur you will only get $2.5 million or even less. Some entrepreneurs thinks that the VC gets most of the profit. Actually, Venture Capital investment company has their own investors which VC has to give back their investment as well as the profit. 

Pay attention to new contracts

In many cases the entrepreneur signed 50/50 contract but towards the end when it is time to sell the company the entrepreneur ends up getting 10% or less. This is because the more Capital requested might reduce your ownership. Another reason is, you might have to share your 50% with your team. Make sure your contract is clear among your team members. 

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Conclusion and Suggestion

Contracts between Venture Capital and Entrepreneur is among the key focus of many research academics in Finance. Most of the entrepreneurs ignore the importance of contract because they are so convinced that they will get 50 percent of the money that will be earned by the company. If you as an entrepreneur aware of exactly how much you will get when the company is sold in trade off or IPO then you will have no regrets. Venture Capital investors also tries their level best to avoid these kinds of misunderstanding because they cannot sell the company unless entrepreneur is fully agreed to sell when it is time to sell. For example if your company was sold for $30 million and you only get $2 million, you might not agree and destroy the contract. Transparency is important for Venture Capitalist and Entrepreneurs. Suggestion is to get a lawyer to have a look at it and explain the terms.