How can you ensure that your investors understand your deal terms?

1 Use plain language

One of the most common mistakes that entrepreneurs make is using too much technical or industry-specific language in their pitch decks, term sheets, or contracts. This can alienate or intimidate your investors, who may not be familiar with the acronyms, the metrics, or the concepts that you are using. To avoid this, use plain language that anyone can understand. Explain the meaning and the purpose of any terms that may be unfamiliar or complex. For example, instead of saying "We are offering a 20% discount on the pre-money valuation for a SAFE with a $10M cap", you could say "We are giving you a lower price for your investment now, in exchange for a promise to give you shares later, based on a maximum value of our company of $10M".

2 Use visuals and examples

Another way to make your deal terms more understandable and attractive is to use visuals and examples that illustrate the key points and the outcomes. You can use charts, graphs, tables, or diagrams to show how your business model works, how your revenue and expenses are projected, how your valuation is calculated, or how your deal structure affects the ownership and the returns. You can also use examples or scenarios to show how your deal terms would play out in different situations, such as a successful exit, a down round, or a liquidation. For example, instead of saying "We are offering a 1x liquidation preference with participating preferred shares", you could say "This means that if we sell the company, you will get your money back first, plus a share of the remaining proceeds, before the common shareholders get anything".

3 Use feedback and verification

A third tip to ensure that your investors understand your deal terms is to use feedback and verification mechanisms throughout the process. You can ask them questions, solicit their opinions, or test their knowledge to gauge their level of comprehension and interest. You can also use third-party sources, such as mentors, advisors, lawyers, or other investors, to validate or clarify your deal terms and to provide credibility and trust. For example, instead of saying "We are offering a 10% equity stake for $1M", you could say "We have validated our valuation with our mentor from the accelerator program, who has invested in similar companies in our sector. He agrees that we are offering a fair and reasonable deal for a 10% equity stake for $1M".

By following these tips, you can ensure that your investors understand your deal terms and that they are more likely to invest in your business. Remember that clarity, simplicity, and transparency are key to building a strong relationship with your investors and to achieving a successful fundraising round.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?