Structuring Investor Agreements

Ever signed a deal that looked great, only to realize later it wasn’t in your favor? Term sheets might look straightforward, but a few hidden clauses can have significant implications. → Anti-Dilution Provisions If you raise future funds at a lower valuation, some clauses (like full ratchet) can drastically reduce your ownership. Negotiate for a fair balance. → Liquidation Preferences: It’s no longer just 2x or 3x preferences. Many investors (especially funds) add hurdle rates for a fixed return before founders see anything. Always check who gets paid first, and how much. → Supermajority Rights: These can block major decisions, even if the investor owns less than 50%. Sounds small, but it can stop a deal in its tracks. → Protective Provisions: Investors may ask for approval rights over hiring, budgets, or strategic moves. Some are fair, others can tie your hands. Know the limits before signing. → Information Rights: Regular updates are fine. But don’t agree to reporting requirements that pull you away from building the business. → Founder Vesting & Performance Clauses: In many early-stage deals, equity is tied to time-based vesting or performance milestones. Miss a target or exit too early, and you could walk away with much less than expected. Search funds often push this further, splitting equity into thirds—for acquisition, time served, and performance. It’s a high-stakes structure. So know what you’re committing to. The problem isn’t one clause. It’s how multiple terms stack in the investor’s favor. So read between the lines, and don’t go it alone: → Get advice from mentors → Talk to other founders → And get a good lawyer (not just to interpret the wording, but to explain the consequences)

“The terms look good… but do they really?” A few months back, I had a founder reach out, excited. She was this close to closing her first big round. The investors seemed reputable, the terms looked fair, and she was ready to sign the paperwork. But she had one last question: “Would you mind just glancing over the agreement?” So, I took a look. And that’s when I saw it—buried deep in the fine print, in that dreaded legalese that most founders tend to skim over. A clause about future dilution. A clause about liquidation preferences. Terms that sounded innocent enough… until you understood what they actually meant. If she had signed, these “small print” terms would have given the investor rights to double their payout in certain exit scenarios, leaving her with a fraction of what she deserved. Lesson? The terms investors don’t highlight are often the ones you need to focus on. Here’s what founders need to know: Investors are smart—they know that most founders are focused on the big numbers: how much they’re getting, the valuation, the equity split. But the real story often lies in the terms buried within the agreement. Some terms to keep an eye on: 🔴Liquidation Preferences Think of this as who gets paid first when the company sells. A “1x preference” means they get their money back before anyone else sees a dollar. A “2x” or “3x” preference? That means they get 2-3 times their investment back, before the remaining funds are split. That can be a dealbreaker for you down the line. 🔴 Anti-Dilution Provisions Sounds protective, right? Well, not always. Some anti-dilution clauses mean that if you raise another round at a lower valuation, their stake doesn’t shrink, but yours does. This could eat up your equity over time if you’re not careful. 🔴 Control Terms Sometimes investors ask for certain controls over decisions—hiring, spending, future rounds. At first, these can seem harmless. But once the honeymoon phase is over, these terms can lead to conflicts that affect your day-to-day operations. Remember… Investors aren’t always highlighting these terms in bright colors. They’re subtle, tucked away, and can sound reasonable until you really think about the long-term impact. I’m not saying all investors are out to take advantage, but it’s their job to protect their interests—just like it’s your job to protect yours. So next time you’re about to sign on the dotted line, make sure you know exactly what each term means. If something doesn’t make sense or feels one-sided, don’t be afraid to ask questions or push back. Because the last thing you want is to celebrate a big funding milestone, only to find out later that you gave away more than you realized. The moral? Don’t just read the numbers. Read the fine print. ♻️ Share this with a founder who could use a reminder about what really matters in deal-making

𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐠𝐨𝐧𝐞 𝐰𝐫𝐨𝐧𝐠: 𝐖𝐡𝐲 𝐬𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐦𝐚𝐭𝐭𝐞𝐫𝐬 𝐦𝐨𝐫𝐞 𝐭𝐡𝐚𝐧 𝐭𝐡𝐞 𝐦𝐨𝐧𝐞𝐲 Once I saved a founder and his firm that was a few hours away from complete collapse. His Series A was supposed to close in 48 hours. Foreign investor had wired $2 million. He was told that his FEMA compliance was wrong. The problem? His team structured the deal under the automatic route, but missed the sectoral cap limit. The investor held 35% equity, but the sector only allowed 26% foreign ownership under automatic route. He had 2 options: 1. Return the money (kill the deal) 2. Get government approval (takes months) But we found option 3. 1. We restructured using convertible preference shares that would convert after obtaining FIPB approval.  2. Filed the government route application while keeping the funds in escrow.  3. The investor stayed.  4. The deal closed 6 weeks later instead of 6 months. 𝐀𝐟𝐭𝐞𝐫 𝐨𝐛𝐬𝐞𝐫𝐯𝐢𝐧𝐠 𝐦𝐚𝐧𝐲 𝐝𝐞𝐚𝐥𝐬, 𝐈 𝐡𝐚��𝐞 𝐜𝐨𝐦𝐞 𝐭𝐨 𝐚 𝐫𝐞𝐚𝐥𝐢𝐬𝐚𝐭𝐢𝐨𝐧 𝐭𝐡𝐚𝐭: 1. Too many companies focus on "closing the round".  2. Don’t consider FEMA rules, sectoral caps, board control provisions, or exit pathways. 3. Others receive convertible notes or SAFE instruments with vague terms that later create valuation disputes. And the consequences? Regulatory action, funding delays, or investor litigation. A poorly advised structure might not violate the law, but it could create massive friction later. Smart FDI totally depends on alignment: 1. Between founders and foreign capital 2. Between Indian law and investor expectations 3. Between commercial ambition and legal compliance So, set it right from day one. Your FDI structure affects how much you can raise. Who can invest? Your exit options. Your board control. Your future funding rounds. Get it wrong once and it haunts every future transaction. Having trouble in structuring options and taking your next steps? Grab our FDI Deal Structuring Toolkit. What legal blind spots are keeping you up at night? Ahmed & Co #FDICompliance #DealStructuring #ForeignInvestment #StartupFunding

Rollover equity. Sounds simple. But in a choppy M&A market full of structure-on-structure deals, it can quietly become your worst investment. Let me give you a real example from a $50M transaction. Our selling founder client was rolling $7M into a large and well known PE fund. No job. No leadership role. Just a 3-month at-will consulting gig—everyone knew they were retiring. The fund had a platform, portfolio co, and full management team already in place. That was the deal from day one… or so we thought. A clean break. But buried deep in the operating agreement governing the rollover equity: • If “services” stop for ‘any’ reason, PE can repurchase the rollover equity at a discount. • Or swap it out for other assets. • Or buy it back with an unsecured promissory note. • All at their discretion. We flagged it thinking it was an oversight. PE and their BigLaw counsel doubled down. “Standard language,” they said. “We do this all the time.” 🙄 Apparently no one read the contract then. This wasn’t some low-dollar acqui-hire with phantom equity. It was a $50M transaction—and the founder chose to roll $7M into the PE fund instead of investing it anywhere else. They kept pushing on this until the day before closing, when they finally caved (only after our client was ready to walk and after a senior decision-maker got looped in and realized how insane the position they were pushing was). Later? We found out they had pulled this stunt on other founders. And our client? Didn’t make the 3 months. The consulting separation occurred a month after close. Could’ve been a big problem had that language stayed. Lesson? If your rollover equity isn’t fully decoupled from employment, you’ve got a problem. Especially if separation without cause lets them claw it back. You’re putting real money back into the deal. You’re being charged fees on it. It’s counted in the transaction value. You deserve protections like a true investor. So, founders: Don’t roll blind. Don’t assume “they’d never do that.” Never ignore the fine print—because that’s where the problems are buried. And if this isn’t addressed early, ideally at the LOI stage, it’ll surface later, when your leverage has eroded. Choppy market or not, structure isn’t going away. Tread carefully. #founders #rolloverequity #mergersandacquisitions

💡 Co-Investments: navigating costs and flexibility💡 In my previous post, we explored how the evolution of co-investments has created new structures, opportunities - and complexities. Now, let’s focus on an essential consideration for LPs: costs and flexibility within co-investment arrangements. As LPs engage with sponsors/managers/general partners (GPs) in co-investments alongside the Main Fund, they must stay vigilant about expenses. Here are some of the key areas where costs may arise: -         📌 Warehousing Costs: If the Main Fund warehouses investments before offering them to co-investors, LPs may be asked to pay interest to compensate the Main Fund for tying up capital (including interest costs on any borrowing related to the warehousing). -         📌 Management and Operational Expenses: These are typically shared between the Main Fund and co-investors on a pro rata basis, but in more complex structures, the cost allocation terms may differ. -         📌 Broken Deals: If a deal does not complete, broken deal expenses may be entirely covered by the Main Fund, pro-rated depending on contributed capital or on pre-agreed terms.   💼 What does this mean for LPs? LPs must ensure that their rights and cost-sharing terms are clearly stated in the co-investment agreements and meet their commercial requirements. LPs should not assume that cost allocations will automatically be favourable or that the Main Fund will cover, for example, broken deal expenses.   🔑 A note for GPs: GPs looking to structure the allocation of expenses effectively need to take note of the rapidly moving market, of potentially competitive new structures that offer LPs a more advantageous position elsewhere and that they are balancing the need to protect their investments (e.g. in warehousing) against the effect of timing and logistics issues on LP capital.   In this ever-evolving market, clear agreements on expenses are crucial to avoid potential conflicts of interest. Both LPs and GPs must be pro-active in structuring these arrangements to ensure mutual success.   If you’d like to learn more about structuring effective co-investment funds, please feel free to contact me either by direct message here or kamar.jaffer@aoshearman.com.   #CoInvestments #PrivateEquity #Expense Allocation #Middle East #AOShearman #Greatfundinsights