I used to be a business broker & I helped people sell, buy, & invest in business, but don't take my word for it and speak with a local expert (many of them are FREE -- Talk to a local business college about Venture Capital investors. They usually have WONDERFUL resources).
Also, as good as this forum is, NEVER use it for legal advice. The price of a good contract lawyer w/ venture cap experience or a venture cap broker w/ approved contracts would be well worth your money. Budget about $1,000 to $2,000 for that. Have them draft the agreement, talk it over with the investors, mark it up, and have them draft the final to sign.
Honestly, I haven't read anything other folks have said, because I don't have the time, but here is the advice I used to give our clients:
You have to think like an investor to figure out if what you are planning would actually work.
1st, let me say, a BANK would give you a much better rate than the investor will.
2nd, don't take any funds from family, unless you don't like your family and are willing to break it apart.
3rd, How much you should pay an investor is directly related to RISK
("beta" in the investing world). The Higher the Risk, the more $$ the investor could earn. The Lower the Risk, the less $$ the investor could earn. With that in mind...
- An investor could put money in the bank & make 2% with NO Risk.
- An investor could put money in the stock market and make 8% to 10% on general low risk large cap funds, but 15% to 18% on moderate risk & aggressive growth funds. (good investors do this every day... I got an edward jones guy doing this for me right now)
- An investor HAS to make at least 6% to 8% per year on every dollar in order to stay ahead of inflation (or to break even over the long term)
- An investor can flip properties at an average rate of 20% - 30% over 1 to 2 years (depending on the market) -- this also has a moderate risk rating.
Venture Capital (by contrast) has a HIGH RISK rating. So expect to pay a lot more than any of the above investments... or why would the VC want to invest?
So here are the unique terms to agree on:
How long the $ will be tied up? (I suggest paying them off ASAP! -- priorities: IRS, BANK, VC)
How much (if any) % of the company they will require?
How much (if any) % of the company they will require in the event that you default on your payments?
And What is their return on their investment?
A general rule of thumb: never (unless the VC has VAST experience in the business) give up a controlling interest (Keep yourself at 51%+ if you can).
If you keep their money for 1 year or less, expect to pay around 10% to 20% or more + a monthly % on the profits (agreed on by you and them with the consideration of RISK).
If you keep their money for 1+ to 2 years, expect to pay around 25% to 50% + a monthly % on the profits (agreed on by you and them with the consideration of RISK).
The biggest problem people run into: valuing their company! We used a national company out of Florida called GCF. They have the most inexpensive business valuations and venture capital valuations and you get a bound book with an explanation of the value. They are certified business appraisers and used by the small business administration, business brokers, VC's, and banks all over the nation. They are GREAT! (I have no connection with them, other than I used them with our clients). Put it in the contract that if you have to give up a % of your business, you will require an independent 3rd party business appraisal from GCF to determine the value of the business at the time of sale or buying them out in the future (or if they buy you out).
You may also need a partnership agreement.
I hope all of that helps. Above all, seek professional help before going VC.