You’ve built a company with a promising future. You’re ready to start looking for funding. You know there are some folks out there (maybe your customers, suppliers, neighbors, values-aligned supporters, etc.) who will be interested in learning more about the opportunity to invest in your company.
That’s great! But at some point you need to tell them EXACTLY what they will be getting for their investment dollars.
The piece of paper that describes exactly what your investors are entitled to can be called by various names: investment offering, investment instrument, or security. There are many different kinds of offerings, some more commonly known than others. Examples include preferred stock, LLC membership units, convertible notes, revenue-based debt instruments, and SAFEs. Within each category, there are numerous choices to make. For example:
- Will investors have voting rights and, if so, what specifically can they vote on?
- How much time can go by before your investors receive payment?
- How are payments to investors calculated?
- Are any payments made as the company grows or only when you sell the company?
- Do all investors have the same rights, or do some have the right to get paid before others?
- Do you have to set a valuation on the company and, if so, how do you set it?
The options for how your offering can be structured are limitless.
A poorly structured offering can create years of misery when you and your investors butt heads over misaligned expectations, while a well-structured offering can be a win-win for all the stakeholders involved—you, your employees, your investors, your customers, and the long-term success of your business.
So, how do you design a win-win investment offering? We like to break it down into a step-by-step process:
- Get clear on the goals, values, and non-negotiables that will inform the design of your offering.
- Choose one of the three main categories of offering (equity, debt, or convertible) and make sure it fits with the legal and tax structure of your your business.
- Decide on your investors’ rights to get paid—when and how much will they make on their investment.
- Decide whether to give your investors any control and, if so, what kind.
- Decide whether to offer any perks, in addition to the investment itself, as a way to motivate larger and faster investments.
If you’d like help designing your offering, please watch for our upcoming announcement on a FREE 5-day challenge—Create a Golden Opportunity for Investors: How to Design a Win-Win Investment Offering. During this challenge, we will give you bite-sized lessons and quick daily assignments that will culminate in your having a customized investment offering drafted.
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