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My startup received a Terms Sheet from an investor and my co-founder and I are trying to figure out if they are saying that they are going to want 30% of our profits at the end of every year or if they are talking about the interest payments?

INVESTMENT SUMMARY: Combined debt and equity investment at 2.5% interest rate per annum with monthly interest payments plus a 30% equity stake. The 30% equity stake would serve as my collateral as well as yielding returns at the end of every fiscal year until maturity of investment. Upon complete repayment of invested amount, the 30% equity stake collateral would automatically revert back to you, however on default; it will be converted to full equity with voting rights.

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2 Answers

up vote 4 down vote

It's a little bit ambiguous. It sounds like:

  1. They loan you money
  2. You pay them interest on the money
  3. If you fail to pay off the debt (or even if you fail to make one monthly payment), they own 30% of the company
  4. If you completely pay off the debt, they don't own 30% of the company -- you own 100% of it again

The part I don't understand here is "...as well as yielding returns." I don't know what kind of business you're running but I assume that it's set up in a way that the profits are paid out annually to the shareholders... and as long as your debt is not paid off, you're paying 30% of the profits to this angel as a shareholder.

Here are three things you should worry about.

  1. Your lawyer should have explained the term sheet to you. Oh, wait, you don't have a lawyer? Then you shouldn't be taking money from investors.
  2. See #1
  3. See #1
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Thank you Joel, we do have a lawyer and that is basically what he said, I was just looking for further reassurance. Our lawyer is working pro-bono for us right now so I wanted to see if I could get another more in depth answer to the "as well as yielding returns part as well as the "Combined debt and equity 2.5% That being said, we don't like the terms of this deal so we are going to adjust the terms to the point where it will probably fall through and we will move on to the next one. – Tom Delaney Dec 9 '11 at 1:56
up vote 1 down vote

Are you setup as an S Corp? That would explain the yearly returns part, since this investor would be a shareholder, they would get their proportionate share of annual profits like all other S Corp shareholders.

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No, we are set up as an LLC. – Tom Delaney Dec 9 '11 at 20:03

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