Investing in an IT Startup: 4 Models of the Relationship Between Investor and Developer

If you’re a developer looking to take your startup to the next level, you’ve probably thought about raising investment. We know how much funding startups need to develop, scale, and improve their position in the market. And if at the first stages investment from friends and relatives who believe in your idea will be enough, then later to compete with larger companies with more resources, you will need to attract more significant investments.

Investing in an IT startup can be risky for both parties. Suppose the relationship between the investor and the developer is not properly formalized, and the parties’ rights, obligations, and responsibilities are not correctly defined. In that case, the developer may lose control over his business, and the investor may lose control over his investment.

In this article, the essay writer from writer service will tell you how to build a relationship between the investor and the developer and their team so that the investment works to maximize profits for both parties.

Let’s look at the main models of the contractual relationship between investor and developer.

Convertible Note

The convertible note is one of the most popular investing methods in IT startups. It should be noted that this type of loan is not regulated by national legislation.

The essence of the convertible note is as follows: the developer (his startup company) receives funds from the investor but undertakes:

• Return the funds received from the investor with interest if the startup is not successful. No new investment is attracted;
• Convert the funds into shares (stakes) in the startup if the startup is successful and the next investment round is made. In this case, the conversion (purchase) is done on more acceptable terms than the purchase of shares by new investors who invested later.

A convertible note is a relatively popular way of attracting investment and does not require a valuation of the startup or its assets, including software as intellectual property. Investors under a convertible loan cannot influence the management decisions of the developer company until the shares are repurchased, which usually cannot help attract IT startups.

Buying shares in Charter Capital

Buying shares in the company’s authorized capital is the easiest way to attract investments by IT startups if they have a registered legal entity or plan to write one. After buying a share in the authorized capital, the developer receives the desired funds or other resources for software development. The investor becomes a participant or shareholder of the company and can influence its management. After purchasing shares, the investor will also have the opportunity to profit from them in dividends or sell them and receive a certain income.

Shareholders Agreement

A shareholders agreement is an agreement between the members (founders) of a company to manage a business, attract investment and bring new people into the business. The shareholder’s agreement can set the scheme and the grounds for the sale of shares, the algorithm for action on the death of a participant, the possibility of attracting new members, a ban on the payment of dividends by investing, etc.

Thus, the shareholder’s agreement is about how the investor and the developer interact so that their actions do not harm the company and each other and so that all parties remain “in the black.

In addition, incorporating mediation mechanisms into the shareholder’s agreement can provide an opportunity to resolve potential conflicts between the founders (participants) of the company before they arise.

Joint venture agreement

In some cases, at the early stages of startup development, it may be sufficient for the developer to conclude a joint operations agreement with an investor or other persons involved in the startup’s growth. Under this contract, each of the participants in the startup agrees to contribute to its development, for example, the investor – to provide funds, the developer – to write code, and the author of the idea – to organize the work and control expenses.

Therefore, the purpose of a joint venture agreement is usually to organize creating an MVP even before registering a legal entity and attracting significant investments.

Conclusion

There are other methods to design the relationship between investor and developer. The choice of a particular interaction model will depend on many factors, and in most cases, on the investor’s will and mutual agreements.

Even though there are hundreds of investors, startups should turn to someone who has a genuine interest in your product, experience, a well-established infrastructure, and will believe in the value of your technology.

And investors, among the thousands of startups, should only choose to invest in those developing current technologies with real market potential.