By: Robert Steele
When asked to sign up to terms by companies (no matter how reputable) for them to secure your investment, be careful and read the small print!
Recently we have engaged two companies, both of whom are seeking c.£500k and both of whom have credibility and opportunity, although they require a little Flamingo Sky ‘sauce’ to get them ready for investment, we believe they could do very well indeed.
However, unfortunately for us (and even more unfortunate for them) they have signed terms with two separate agencies who are now formally contracted to deliver inward investment. One of which is an accountancy and the other ‘so called’ accelerator.
The reason this is unfortunate, is that the terms of these pre-agreements are so onerous as to make investment almost impossible. For example, one condition is the receipt of c.5% of the money raised…which is fine…BUT they will also get 20% of the future exit value!
Charging 5% or even 10% on the money raised is fine! but 20% of the exit value….ludicrous! No individual, fund or other such investment source would entertain a deal with that caveat.
In other clauses we see, 3 year tail periods, rigid exclusivity and, bizarrely, a charge on all money raised even if not from the efforts of the company who are supposed to be raising it!
The lesson here is to read the small print and THINK! Think about what you are doing and how, through these clauses and terms, you are effectively putting all of your eggs in one basket, trusting one company to deliver whilst leaving yourself with no room to manoeuvre.
When you sign up with a partner, like Flamingo Sky, make sure the terms are not too onerous, that you can cancel the arrangement with as little as 30-days notice and that the tail-period is no more than 12-months.
Make sure you give yourself the opportunity to pivot should the need arise.