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Startup investment transactions bring together financial, commercial and legal considerations that founders and investors need to address throughout the investment process. Preparing the business for investment, understanding its key performance indicators, determining the investment structure and valuation, conducting due diligence and negotiating the transaction documents are all part of this process.
Startup Investments: A Handbook for Investors and Entrepreneurs, prepared by Harvey Arasan and Binovative, provides a practical overview of these stages from the perspectives of both founders and investors. The handbook covers the preparation and investment process as well as key concepts commonly encountered in startup investment transactions.
Preparing a Startup for Investment
Preparation for an investment starts before the parties begin negotiating transaction documents. Founders need to understand their business model, target market and competitive position, prepare financial projections and identify the metrics that demonstrate the company’s performance and growth potential.
The handbook examines key performance indicators and metrics including Monthly and Annual Recurring Revenue (MRR and ARR), Revenue Growth Rate, runway, burn rate, customer churn and retention, Customer Acquisition Cost (CAC), Return on Investment (ROI), Return on Equity (ROE) and market penetration. It also discusses how these metrics can be selected and presented to investors.
Investment Meetings and the Pitch Deck
The investment meeting is an opportunity for founders to communicate not only their business idea, but also the company’s market position, financial performance and growth potential.
The handbook considers the elements of an effective pitch deck and investor presentation, including the use of KPIs and data, presentation of the problem and solution, market and competitive analysis, the business model, financial projections and preparation for investor questions.
Understanding the Investment Structure
Once an investment progresses, founders and investors need to understand how the investment will affect the company’s capital and shareholding structure.
The handbook explains different funding rounds and uses practical examples to illustrate the relationship between company valuation, nominal share value, capital increases and the number and percentage of shares acquired by an investor. It also explains why an external investor will typically subscribe for new shares at a premium over their nominal value and illustrates the potential dilution effect of issuing shares at nominal value.
For a closer look at this issue, see our article on the difference between the premium share price paid by an investor and the nominal value of a share.
Due Diligence in Startup Investments
Due diligence allows an investor to evaluate the risks and liabilities associated with the startup and the proposed investment before the transaction is completed. Its findings can also identify actions to be taken by the founders and influence the structure and negotiation of the transaction documents.
The handbook provides an overview of legal, financial, tax and, where relevant, technical due diligence. It also examines the scope of legal due diligence, including corporate matters, material contracts, financing arrangements, employment, intellectual property, regulatory compliance and litigation, together with the preparation of the data room and due diligence report.
You can also read our detailed overview of Key Elements of Legal Due Diligence.
Key Documents in a Startup Investment
A startup investment typically involves several documents serving different purposes throughout the transaction. The handbook examines some of the principal agreements founders and investors may encounter, including:
Non-Disclosure Agreement (NDA) — used to protect sensitive information shared during investment discussions.
Letter of Intent / Term Sheet — establishes the framework for the proposed investment and its principal terms.
Investment and Shareholders’ Agreement — governs the investment transaction and sets out the rights and obligations of the parties.
Escrow Agreement — may be used in connection with a reverse vesting arrangement to hold and manage shares subject to the agreed mechanism.
Key Provisions in Startup Investment Agreements
Investment agreements allocate rights, obligations and risks between founders and investors. The handbook introduces a number of provisions that frequently play an important role in this allocation, including:
- conditions precedent and regulatory approvals;
- representations and warranties;
- disclosure letters;
- Material Adverse Change (MAC) clauses;
- non-compete provisions;
- anti-dilution provisions;
- drag-along and tag-along rights; and
- reverse vesting.
From Signing to Closing
Signing the investment agreement does not necessarily mean that the investment has been completed. Where conditions need to be satisfied before completion, the transaction enters an interim period between signing and closing.
The handbook explains the purpose of this interim period, conditions precedent and restrictions that may apply to the company’s activities before closing. It also provides a practical overview of the closing process in an investment implemented through a capital increase, including the general assembly meeting, registration and payment of the investment amount.
Download Startup Investments: A Handbook for Investors and Entrepreneurs
Startup Investments: A Handbook for Investors and Entrepreneurs brings these topics together in a practical guide designed for founders, angel investors, venture capital investors and companies considering investments in or collaboration with startups.
The handbook was prepared by Deniz Eray Harvey and Murat Peksavaş, combining legal, investment and entrepreneurship perspectives on the startup investment process.
Download the Startup Investments Handbook
Legal Advice on Startup Investments
Harvey Arasan advises founders, investors and companies on the legal aspects of startup investment transactions, including due diligence, transaction structuring and the negotiation and preparation of investment and shareholders’ agreements.
For legal advice regarding a startup investment or investment transaction, please contact Harvey Arasan.
