My startup received a Terms Sheet from an investor and my co-founder and I are trying to figure out if they are saying that they are going to want 30% of our profits at the end of every year or if they are talking about the interest payments?
INVESTMENT SUMMARY: Combined debt and equity investment at 2.5% interest rate per annum with monthly interest payments plus a 30% equity stake. The 30% equity stake would serve as my collateral as well as yielding returns at the end of every fiscal year until maturity of investment. Upon complete repayment of invested amount, the 30% equity stake collateral would automatically revert back to you, however on default; it will be converted to full equity with voting rights.
It's a little bit ambiguous. It sounds like:
The part I don't understand here is "...as well as yielding returns." I don't know what kind of business you're running but I assume that it's set up in a way that the profits are paid out annually to the shareholders... and as long as your debt is not paid off, you're paying 30% of the profits to this angel as a shareholder.
Here are three things you should worry about.
Are you setup as an S Corp? That would explain the yearly returns part, since this investor would be a shareholder, they would get their proportionate share of annual profits like all other S Corp shareholders.