What Angel Investors Want To See In Your Sales Contracts
As a founder raising seed capital, you know your revenue numbers inside and out. But can you convince investors that this revenue is sustainable?
Angel investors are looking for companies that can deliver returns of 10x or more on their money. To show them you can scale profitably, you need to have robust sales contracts on your books.
Why Sales Contracts Are So Important
Telling an investor you’re “in talks” with customers isn’t enough — and anyone can add a slide of “featured partner” logos to their pitch deck.
But if your company already has sales contracts in place, you can show that your go-to-market strategy is working. These contracts let investors see that their cash will be used to grow your company, and not just to fund day-to-day operations.
Sales contracts are also a great source of metrics and data that you can share with your angels. For example, a quick analysis of your contracts will reveal:
- The length of your sales cycle. Do some kinds of customers sign right away? Which buyers drag out the sales process, and why?
- Customer pain points. Which contract terms do buyers change most often? Do they balk at the price? Are they asking for different or additional features?
- Most and least productive sales strategies. Do customers ask to bundle some of your products together? Are they more interested in paying if you give them a free trial first? Your contracts can document any experiments you make along these lines, and show which ones create the most value.
- Ongoing insights. Which contract metrics predict how profitable a deal will be? How might you use this information to acquire more customers?
What Terms Do Investors Want to See in Your Sales Contracts?
Sales contracts demonstrate your growth potential — and give investors comfort about how you conduct business. Here are some terms that can show you’re on a solid financial foundation.
1. The right corporate structure
By the time you’re fundraising, investors generally want to see you set up as an LLC or corporation. Sales contracts shouldn’t be signed by an individual, a DBA, or brand name.
This goes for your customer, too. Is the signer a legal entity that’s able to pay you? Or is it an undefined group or division that has no real accountability?
2. Intellectual property protection
Your intellectual property (copyrights, trademarks, patents, and trade secrets) could become one of your company’s highest-valued assets. Investors will want to make sure that your IP won’t be subject to expensive and time-consuming claims from other parties.
That’s why your company should retain control over its IP rights. If you’re collaborating with another company, it may make sense to give them just a limited license, and not share ownership.
3. Pricing that supports future growth
Ideally, your sales contracts will include some kind of mechanism for growing revenue automatically. Depending on your sales strategy, you might include annual price increases, maintenance fees, or other recurring charges.
Your contract can also make it easy to upsell or add new services without negotiating a separate agreement. Statements of work, order forms, and product menus can be added to the document to make life easier for you and your buyers.
4. Payment terms that help your bottom line
Are your contract terms limiting your revenue, or letting customers delay payment? For example:
- Payment terms: Many large companies ask for 90–120 days to pay. A young startup living month to month may not be able to hold out this long.
- Discounts: If you offer reduced prices, investors will look for evidence that the lower fees are actually attracting more customers.
- Refunds: Money-back guarantees can build trust, but at the same time they can cut into your profits.
Still, you may decide to offer these kinds of concessions to get deals done, especially for your first few buyers. It’s a delicate balance, and running a few scenarios through your favorite financial modeling app will help you figure out the tradeoffs.
5. An appropriate contract duration
Your contracts should allow your company enough time for you to book revenue — and for your customer to get a solid, quantifiable return on the money they’ve paid.
The right contract duration will vary by company and industry. As you may have already experienced, projects in corporate America can take several months to a year to complete. A proof of concept may be finished in a shorter time frame, often anywhere from 1–6 months.
6. No unnecessary risk
Your company should not be signing up for unlimited liability, pages’ worth of warranties and indemnities, or other major financial exposure. Your advisors, including lawyers and accountants, can give you some input on what’s market standard for your industry.
The key word here is unnecessary risk. The most successful startup CEOs I’ve seen are the ones who negotiate strongly on a handful of contract clauses that are truly important to their company, and find ways to accommodate their customers on the rest.
7. Industry-specific compliance terms
If you’re in the tech, healthcare, finance, or consumer spaces, you’re probably used to hearing investors ask, “But how are you dealing with privacy laws?” Other industries also have their share of compliance challenges, ranging from environmental hazards to cybercrime and beyond.
Your contracts can address this proactively with a section, or even a separate exhibit, outlining your compliance practices in clear language. By addressing these issues head-on, you show your investors that you’re ready to compete in a regulated market.
8. What happens if you get acquired?
Finally, your contract should have an assignment clause that describes what will happen to the agreement if another company buys yours.
Most customers will agree to keep purchasing from the company that acquires you, as long as they keep getting the same quality of goods or services after the acquisition.
Your contracts with customers should answer these questions:
- Can the contract be terminated if your company gets acquired?
- Does the customer have to consent for the contract to be assigned to the company that acquires you, or will this happen automatically?
What if you don’t have signed contracts yet?
Investors generally look for executed contracts between you and your customers or other business partners. “Agreements to agree” — like non-binding term sheets, letters of intent, or confidentiality agreements to discuss potential projects — typically don’t get investors excited.
If you have contracts that are still in the negotiation stage, and if it’s OK with your customer, and it won’t put you in breach of a confidentiality obligation, you might let investors see a high-level summary of the terms you’ve agreed on so far. You may get questions about what issues remain open, how you plan to resolve these open items, and when you expect to sign the contract.
For contracts that are still being negotiated, you may have to redact sensitive information or take other steps to protect your customers’ confidentiality. Your contracts may even have a clause that would require third parties (like investors) to sign an NDA before seeing their terms. However, most angels won’t want their access to be limited in this way. Instead, they’ll often expect you to coordinate with your customers to make sure you can share the information they need.
If disclosing contract documents isn’t possible, it may make sense to set up calls between your prospective investors and your key customers so you can provide a general sense of the terms.
Closing the Deal
Sales contracts show investors that your company has a documented path to profit, with customers who are interested in your product. Strong contract practices demonstrate to investors that you are ready to take on the unique challenges of your market.
Ultimately, your company’s sales contracts might make the difference in whether an angel chooses to invest in your vision.
Please note: This article is my opinion, and is not legal advice. If you are seeking legal advice on a sales contract or other issue, please feel free to contact me for an initial discussion.