contract(7/0)
Contracts are the arteries of business
If accounting is the life blood of business, contracts are the arteries. Contracts, whether oral or written, bind parties by agreements through which assets flow. There are vena cava contracts which supply the business with its essential funds, such as a property loan to a restaurant. Others are minor capillary contracts which perform limited support, such as an oral contract to sell a sofa at a 5% discount if it’s paid in cash.…
Both investors and entrepreneurs need equal motivation
The economic clauses on the term sheet have long-term implications to the motivation both of investors and of owners. What motivates an entrepreneur to seek investment in their business model? The prevailing motivation is pride of ownership. To see one’s idea made a reality and to witness others enjoy the fruit of one’s idea. To have created something new in the world. These are the prevailing motivations. Closely tied to pride of ownership is capital ownership, or the realization of one’s effort in financial gain.…
Employment contract pitfalls
Business owners must take care when signing an employment contract. The most common condition of employment in the United States is “at will” employment. This means that both parties, employer and employee, are under no obligation to work together any longer than desired. If the employee wants to leave the business for any reason, he may do so without penalty. Likewise, if an employer wishes to fire an employee, she may do so.…
Include worse case in the contract
In a contract, don’t forget to negotiate the worst-case too. Let’s say a business owner wants her website remodeled. She shops around, finds a software developer who does contract work, asks for a bid, and likes the price. Technology makes her nervous, and the price seems reasonable, so she negotiates a deal with the software developer for an April 30th deadline, three weeks away, for $2,000. She turns her attention to running the business, confident she’ll have a new website soon.…
Investors are partners long after the contract is signed
Treat the term sheet negotiation as only a part of the total deal. Many entrepreneurs may falsely conclude that, since the term sheet sets the rules of the investment contract, it is therefore the only important negotiation. Their efforts are isolated to a search for a VC who will offer a term sheet, then to gain a few term sheets to play off one another, and finally to negotiate every relevant section of the term sheet until they’re happy with the results.…
Offer equity and power with utmost caution
Hoard equity like gold and protect it accordingly. When a business begins, all it may have is equity and a little startup capital. When a venture capitalist offers professional support and a sizable financial boost for a marginal 3% ownership share, many entrepreneurs feel honored by the attention given to their fledgling business and measure the 3% only by what they have in the bank - not much. The entrepreneur may think, “I have 97%, and the venture capitalist has 3%.…
Read the term sheet control clause carefully
The control clauses on the term sheet can reorient the power of investors or owners regardless of share percentage. Investors and entrepreneurs share a common financial motivation in their company. The entrepreneur grows the value of her shares when the company performs well, and the investor maintains good prospects for a multiplied return on investment. When both parties think wisely about the long-term effect on the company, they will negotiate economic terms that offer mutual motivation to see the company succeed.…