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I'm planning to start a startup with the help of a seed capital firm. The firm has presented its terms and I'm not sure if what they ask if acceptable/normal for the low-equity they are having (5%). Some of those terms include:

1) We cannot sell our stock and we cannot accept funding from other firms without their written approval.

2) The seed capital firm wants to be able to sell ALL the stock (founders stock + their part).

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3 Answers

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Do you have your own lawyer and accountant? What do they think of the terms? If you don't have a lawyer, stop, do not pass go, do not collect $200 and go find one pronto.

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We do have our own lawyer. What he says is that it is mostly about what we want from the deal. – Dane Elec Feb 24 '10 at 16:24
How about an accountant who's worked with startups before? – Elie Feb 24 '10 at 17:26
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Dane: Doesn't sound like your lawyer is very good. A good lawyer will walk you through the pros and cons of accepting the term sheet. – Joseph Turian Feb 25 '10 at 4:13
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Following Elie's lead, you should really think through what the term sheet is, what kind of money they are offering (hint: not the amount) and how it will impact your companies ability to move forward.

some good links:

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Hi jimg, thanks for your comment. The money they are offering is in the form of capital but also advise and experience. Although that is very important to us I'm unsure of how much I want to give away in return. With such terms I fell I'm an employee and not a business owner. – Dane Elec Feb 24 '10 at 16:23
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I would be very leery of these terms.

From Venture Hacks: “[Our existing investors] had put in a right of first refusal. Since I was a young entrepreneur at the time, I didn’t understand that this basically meant that you couldn’t go to any other VC… We could not get a higher valuation because [our existing investors] wanted to put more money in the company themselves. So any time we would talk to another VC, they would talk him out of it: “This is not a good company, don’t worry about it.” So we were really stuck with [our existing investors] for the next round.”

Aside: TheFunded is a great forum for asking about deal terms. (answers.onstartups.com is great, but on questions like deal terms I haven't found that people like to drill into the implications.)

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