Most entrepreneurs are faced with the challenge of dealing with investors because most prospects of financing agreements are, in most cases, written in favor of the investors. Therefore, in their quest for raising capital for their business either in form of equity funding or debt, most of them end up in more problems than they anticipated at first. On the other hand, any investor seeking to invest in a growing business need to be assured that their investment is secured, and that they will in turn gain profits for their investments. Both the entrepreneur and the investors are concerned about the business in different perspectives.

The aim of an entrepreneur is to seek funding for the business, to help in its expansion. The funds could be raised in form of debts or funding from investors (Bygrave & Zacharakis, 2010). When seeking funding from investors, the venture capital firms could raise agreements that mainly favor the investors. Entrepreneurs should try their best to choose their first investors carefully, by completely disagreeing to the terms that could limit the growth of the company or act as a barrier to other investors.

When negotiating an agreement with the investor, an entrepreneur should be concerned whether the agreement made on the term sheet could lead to his loss of control over the business or dilution of the business. It is also important for the entrepreneur to be concerned about dividend payments, because the main aim of the business is to make as much profits as possible (Bygrave & Zacharakis, 2010). The venture capitalists could alter the agreementsin the term sheet to ensure that they get a huge share of the dividends. It is, therefore, important for theentrepreneur’s attorney to be familiar with the restrictions and the traps that are found in many venture capitalists financial documents (Bygrave & Zacharakis, 2010).

The investors are concerned about return on their investments, which is the sole reason why they invest. Most of them demand an IRR of about 15% in the first five-seven years (Bygrave & Zacharakis, 2010). Therefore, before making an agreement, they need to ensure that the business promises a better return as stated in their business plan. The way the risk of a business’ failure will be mitigated is also the concern of an investor. The investors need assurance that any seeming risk that can lead to failure of the business is put under control, to avoid any loss to their investments. The investors also have a concern about the representation of the board of directors. They seek to have their representatives who will carry forward their interests in having as much control of the business as possible.

Both the entrepreneurs and investors should be concerned about their rights and obligations as laid out in the term sheet. Each party should ensure that none of the laid out rights in the legal documents are violated by either party. They should also be concerned about the business’ continued delivery of best products and services after the agreement, to ensure that the goal of profit optimization is met. They should also be concerned about the confidentiality of their negotiations. Neither the business nor the investor should disclose the information to unintended individuals

It is important for an entrepreneur to have a well-established business plan and understand the legal documents that are prepared for venture capitalist negotiations. The knowledge will help them have a better access to venture capitalist financing.

Reference

Bygrave, W. & Zacharakis, A. (2010). Entrepreneurship, 2^nd Edition. Hoboken, NJ: John Willey & Sons, Inc.