Direct Investing Contracts and Agreements
Richard C. Wilson narrates an educational video about contracts and agreements used in direct private company investing.
Richard C. Wilson presents a practical guide to the paperwork that can appear when an investor puts money directly into a private company. He says the video focuses on understanding document types and their purposes, while the specific terms inside them are a separate matter. The material covers equity investments and closes with a brief discussion of paperwork for a company loan.
In this video: Richard C. Wilson (Narrator)
What they said
- Richard on legal fees for small rounds. Richard says legal fees for early stage investment rounds typically range from $5,000 to $10,000. A full set of complicated documents can exceed $30,000 to $40,000, so he asks whether that expense makes sense for an investment of only $25,000. (at 0:59)
- What a PPM can include. Richard says a complete private placement memorandum can serve as the only agreement needed for a direct investment. He describes it as covering the offering, company information, financial statements, risk factors, an investor survey, a capitalization table, and a purchase agreement. (at 2:23)
- How term sheets work. Richard says a term sheet sets out the terms under which an investor will invest, including share details and rights. He notes that some investors prefer shorter term sheets, and that the terms may be included in a private placement memorandum or negotiated separately. (at 3:48)
- Purchase and shareholder documents. Richard describes a subscription agreement, also called a stock purchase agreement, as the sales contract for the securities. He says a shareholders agreement is distinct and may address how shares can be sold or transferred. (at 5:13)
- Other equity paperwork. Richard says an investors rights agreement can cover potential issues if a company goes public. He also explains that a company may need an updated certificate of incorporation to support new shares, shareholders, board members, or negotiated terms. (at 6:38)
In their words
"it is just a matter of which side starts the negotiations"
Why it matters if you are building or preserving great wealth
Richard says a promissory note may be a lower cost option for a debt arrangement. That makes the choice between a loan and equity relevant to the paperwork burden he describes.
From Richard's exclusive Billionaires.com interviews
Lessons from Richard C. Wilson's one-on-one interviews, as published on each interview page.
- Michael Lee-Chin: Invest in what people will do next. He saw that his generation would shift from consuming to saving and investing. He chose wealth management companies over banks and insurers to avoid underwriting losses.
- Tom Rosen: Buy when the market is down. Tom bought a lot when the stock market almost collapsed and made a substantial profit. In the year that followed, oil and gas surged. So did some tech.
- Tim Draper: Teach children about money early. Give them a small allowance and have them earn and invest money in the stock market. Over time they learn to ask sharp questions about how a business works.
See the data
Frequently asked questions
What may an investor request when taking a board seat?
Richard says an investor may ask for officer indemnification that protects against liability resulting from company actions, and may request a copy of the company's directors and officers insurance policy.
What can an options agreement specify?
Richard says it may set out strike prices, vesting schedules, and other terms governing the granting and exercising of stock options. He notes that options may affect an investor's eventual ownership percentage.
What does a company loan note cover?
Richard says a promissory note or debenture records the principal owed, interest rate, and maturity date. He presents it as a possible single document for a debt arrangement.
Sources
Quotes are copied from the video captions and checked against the transcript. Timestamps link to the moment in the video. General information only, not legal, tax or investment advice.