By Ori Kitov
Lately, everyone is talking about how the market is on fire. As a lawyer, I’ve been dealing with anomalous volumes of transactions, especially in the Hi-Tech field. Many Hi-tech companies have been raising capital this past year and are demonstrating immunity to COVID before and after vaccination levels have increased.
If you’ve been considering making an investment in such companies, here are 5 things you should consider before signing your MOU or definitive agreement:
Equity ,equity, equity and again- Equity.
Your way to invest is obviously through the company’s equity. It is your responsibility to ensure you are aware of ANY kind or form of equity.
Start-up companies often deal with the necessity of raising money and recruiting talented human capital. Both of these tasks create opportunities for earning equity as they entice new partners.
For example, initial investors in a startup during its “seed” stage, will have a higher probability to receive preferred shares which grant a wide range of rights. While later investors would obtain a different kind of share with little or less rights than earlier investors.
Without discussing SAFEs (simple agreement for future equity ) and CLAs (convertible loan agreement), I highly recommend channeling your due diligence efforts around your equity options. Request cap-tables, documents and any other “promises” your target company discussed to ensure you have a complete and mutual written agreement.
Business plan
AI (Artificial Intelligence) and cyber companies are unique in terms of their products. If we compare an AI company to a REIT, an AI company is a concept difficult to physically see, complex to operate and generally can make investors unsure of future profits. A REIT has tangible assets and the idea of how to make profits is intuitive. This can make an investor feel lost.
The solution is to add representation to the agreement of the business plan for the target company. This lets you and the target company know that you are making your investment decision based on the business plan attached to the agreement, and in case you were misled, you would have remedy by virtue of your agreement.
