At this very first stage of a transaction, you must establish that the investor has the financial capability to do the deal, and is seriously interested in proceeding with a transaction. Introducing Your Company Your goal at this stage, assuming you have bona fide investors in front of you, is to give them enough information about your business to motivate them to want to proceed with more in-depth discussions, leading to negotiation of an offer to invest. If all goes well in the meetings with the investors, things will progress to the point that one side or the other will want to suggest the basis structure of the deal, which is often referred to as preparing a term sheet. The term sheet can be a very brief, bullet point statement of how much money the investors would put in, what equity share they would receive, the time frame for completing their analysis of the company and getting the formal documents ready in preparation for closing the transaction, and other basic terms. This amounts to the investigative phase of the transaction, in which the investors looks into your company, its records, its history, and financial condition in great depth.
Due diligence is a mutual exchange of information.
Here is your chance to ask enough questions to satisfy yourself that these people will make good long-range partners for you. If you find out they have never been involved in a venture capital-type transaction before, it is reasonable to wonder whether they will be able to endure the inevitable ups and downs of small company ownership. As the transaction moves toward a close, the documentation that is passed back and forth from the investors to the entrepreneur, becomes more specific and detailed. The next formal document after the term sheet is usually called the letter of intent. The closing documents bind both parties to completing the transaction.