Startup teams have a lot of questions in the MEA region. One of the reasons is that they are very young and inexperienced in the complexity of running the business but also the legal part is a great unknown. Once they start talking about investments, even before MVP, they see the pink cloud coming, showering them with money and giving a feeling of achievement. Wrong, the money is there to make more money in the first place. Also for the founders of course, but getting the money is preceded by some legal groundwork. And here even more questions arise and getting good advice is hard to get, even more, confusing, buzzword-driven and complex. Like any insurance policy, the small print matters a lot.
I personally insist on a term sheet agreement first. It is not binding but you understand about valuation, roles, responsibilities. You also need to discuss the bad scenarios, like in marriage you might split ways and it is good to discuss and agree. I once wanted to leave a company that I founded but on the way took 2 partners on board in a 1/3 shares distribution. It took me a year and a lot of pressure to get out of it. Everything was foreseen, except the split.
Once the term sheet is discussed and agreed you can draft the shareholder agreement. The legally binding document in which you can even refer to the signed term sheet as part of the clauses. Frustrating is that I see a lot of investors tilting the paperwork on the shoulders of the startups. İn my opinion investors need to draft this and understand the different investment products and how to proceed and finalize the term sheet and shareholder agreement. The startup can have a lawyer of her or his choice to protect the interests of the startup. Especially for seed and angel and being the first round, this is very important.
An investor is not just wiring money but should show a professional hand when leading the startup. Unfortunately, I see more the opposite working method. Sorry to say this, but that is amateurism from the investor. Let’s reverse this into a more professional approach, it will result in a better functioning ecosystem.
Patrick Bosteels, Stage-Co Co-Founder
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