Terms preferred by different types of investors

Nimit Ramaiya

12/5/20232 min read

1 U.S.A dollar banknotes
1 U.S.A dollar banknotes

As a founder seeking funding, it is important to note that investor preferences can vary based on individual goals, the stage of the company, industry, and the specific investment opportunity.

Here are some typical terms preferred by different types of investors:

1. VCs:
Equity Ownership: VCs typically seek a significant equity stake in the company in exchange for their investment. The exact percentage varies but often depends on the stage of the company and the level of risk.

Preferred Stock: VCs often request preferred stock with specific rights, such as the ability to participate in future financing rounds, receive dividends, and have protective provisions.

Liquidation Preferences: VCs may negotiate for a liquidation preference, ensuring that they receive their initial investment back (or more) before other shareholders in the event of a sale or liquidation.

Board Seats: VCs usually seek board seats or board observer rights, allowing them to have a say in the company's strategic decisions.

Vesting Schedules: VCs may require founders and key employees to have vesting schedules for their shares, ensuring they remain committed to the company.

2. PE Investors:
Majority or Control Ownership: PE investors often aim for a majority ownership stake, allowing them to control the company's operations and strategic decisions.

Buyouts: PE investors often invest in mature companies or participate in buyouts, seeking to improve operations and achieve financial returns through growth and cost-cutting measures.

Debt Financing: In addition to equity investments, PE investors may provide debt financing, often referred to as leveraged buyouts (LBOs), where they use a combination of equity and borrowed funds to acquire or invest in a company.

Exit Plans: PE investors typically have specific exit plans, whether through an eventual sale to another company, an IPO, or other means.

3. Angel Investors:
Equity Ownership: Angel investors may seek equity ownership in exchange for their investment. The percentage is usually smaller than that of VCs but can vary widely.

Convertible Notes or SAFEs: Some angel investors prefer investing through convertible notes or Simple Agreement for Future Equity (SAFE) instruments. These instruments convert into equity at a later funding round, allowing them to postpone valuation negotiations.

Involvement: Angels often invest not only for financial returns but also for personal involvement in the companies they support. They may provide mentorship, advice, and connections.

Early-Stage Focus: Angels frequently invest in early-stage startups, contributing their expertise and capital to help these companies grow.

Negotiating investment terms is a complex process, and it often involves finding a balance between the interests of both the investor and the startup founder. Consulting with legal and financial professionals is advisable when structuring investment deals.