What is the difference between a term sheet and a subscription agreement?

A term sheet summarizes proposed terms, often with only certain provisions binding, while the subscription agreement is the final, binding document under which the investment is actually made.

What are pro rata rights?

Pro rata rights give an existing investor the option to invest in future financing rounds in proportion to their existing ownership, helping the investor avoid dilution over time.

Does a private investment need to comply with securities law?

Yes. Private investments are securities transactions that generally rely on a registration exemption, most commonly under Regulation D and may trigger federal and Florida notice-filing obligations.

What information am I entitled to as an investor?

This depends entirely on what is negotiated in the investment documents. Investors commonly request periodic financial statements and, for larger investments, board observation or consent rights over major decisions.

Can the company raise more money later without my consent?

It depends on the protective provisions negotiated in the investment documents. Some investments include consent rights over future financings; others do not, leaving the company free to raise on its own terms.

Private Investment Transaction Attorney

Legal counsel for structuring and documenting private company investments.

Documenting a private investment correctly

A private investment transaction is governed entirely by the documents the parties sign: there is no public market or standardized disclosure regime to fall back on. Precision in drafting is what protects both the investor's capital and the company's ability to operate and raise capital later.

Typical transaction documents

Subscription or purchase agreement: the instrument by which the investor acquires the security.
Investor rights or side letter: information rights, board observation rights, or pro rata participation rights in future rounds.
Amended governing documents: updates to the operating agreement, bylaws, or shareholder agreement to reflect the new investor.
Disclosure schedule: the company's disclosures about its financial condition, litigation and material contracts.

Investor protections commonly negotiated

Information rights: periodic financial reporting obligations from the company.
Pro rata rights: the right to participate in future financing rounds to avoid dilution.
Board or observer seats: a role in governance proportional to investment size.
Protective provisions: investor consent rights over specified major company decisions.

Securities-law compliance runs alongside the documents

Every private investment is also a securities transaction under federal and Florida law, generally relying on a registration exemption. The company's securities counsel should confirm the applicable exemption and any required notice filings before the investment closes.

Process

1
Term sheet
Negotiate the key economic and governance terms before full documentation.
2
Draft
Prepare the subscription agreement, disclosure schedule and any side letters.
3
Compliance
Confirm the applicable securities exemption and coordinate any required filings.
4
Close
Execute documents, update the cap table and fund the investment.

How an investment round is documented

Private investment terms sit on top of the company's existing structure. They are documented in a set order.

Existing structure
Cap table, governance and any prior instruments already outstanding.
Instrument
Priced equity, convertible note or a simple agreement for future equity.
Investor terms
Economics, information rights, consent rights and transfer restrictions.
Closing record
Subscription documents, approvals and an updated ownership record.

General sequence only. It is not legal advice and does not predict eligibility, cost or timing in any particular matter.

Answers

Frequently asked questions

What is the difference between a term sheet and a subscription agreement?: A term sheet summarizes proposed terms, often with only certain provisions binding, while the subscription agreement is the final, binding document under which the investment is actually made.
What are pro rata rights?: Pro rata rights give an existing investor the option to invest in future financing rounds in proportion to their existing ownership, helping the investor avoid dilution over time.
Does a private investment need to comply with securities law?: Yes. Private investments are securities transactions that generally rely on a registration exemption, most commonly under Regulation D and may trigger federal and Florida notice-filing obligations.
What information am I entitled to as an investor?: This depends entirely on what is negotiated in the investment documents. Investors commonly request periodic financial statements and, for larger investments, board observation or consent rights over major decisions.
Can the company raise more money later without my consent?: It depends on the protective provisions negotiated in the investment documents. Some investments include consent rights over future financings; others do not, leaving the company free to raise on its own terms.

Official sources

Consult the official sources above for current rules and procedures.

Private Investment Transactions