Knowing what questions to ask investors can start your business venture off on the right foot. Before signing with a new venture capitalist (VC) or selling part of your company, be sure to ask them questions like the following:

  • What Is the Current State of Your Fund?
  • What Other Investments Do You Have?
  • How Do You Choose Your Investments?
  • Are You Willing to Lead a Financing Round?
  • What Are Your Terms?
  • How Involved Will You Be With the Company?

What Is the Current State of Your Fund?

One of the most important things to know is if the investor's fund has enough money in it to make a sizable investment in your company. Knowing the status of the fund and how much liquid capital it has is critical. After all, an investor won't be of much help if they don't have the money to contribute to your company. You should also know about the fund's availability and whether it has enough money to make additional investments as needed over time.

What Other Investments Do You Have?

Ask potential investors if they focus on a specific industry or geographic region. This will help you know if your company is a good fit for their portfolio and if they will be able to provide advice for your venture. You'll also want to know what other things, aside from the money, they can bring to the company, such as networking connections or experience.

Ask about the VC's track record of investments, including how successful other businesses they've funded have been. Ask the investor to describe their most successful investments and those that they've been proudest of, and ask what the fund has done to help with the success of other businesses. You can even ask for references and talk to CEOs and leaders of other companies that the VC has invested in to get their perspectives.

How Do You Choose Your Investments?

Not only do you need to choose an investor, but the investor also has to choose you. Is the investor interested in your company? Ask what metrics they look at when considering what investments to make. This will give you a good idea of how the VC operates and can help your company know what to work on to raise additional capital.

You should also ask how many investments the VC makes per year and how big they typically are. If the fund's money is already distributed to a number of other ventures, it might not have enough capital to contribute to your company at the level you would like.

Are You Willing to Lead a Financing Round?

The lead investor of a financing round is a critical role that can make or break your fundraising goals. The lead investor typically sets the terms and pricing for the rest of the round. You'll want an investor who is not only willing to lead the round but who also has experience doing it in the past.

In many cases, an investor will want to co-lead a funding round with someone else. Ask if the investor likes to work alone or if they have other VCs they typically co-invest with. This can help you plan your funding round and know how many people will be involved in your company.

What Are Your Terms?

How an investor values your company is important, but the terms of the deal can be even more important. In order to know what is standard practice for investor terms, you should work with an experienced lawyer who can guide the process.

Investors typically have a set of standard terms they like to follow for each deal, and a lawyer can help you know if these terms are in line with what is generally accepted in the market. Agreeing to outrageous or unfair terms can set the tone for your relationship with the investor and be costly down the road.

How Involved Will You Be With the Company?

Some investors like to hold a seat on the board of the companies they invest in. If this is the case, you need to know if you can have a good working relationship with the investor.

If the investor wants a seat on the board, ask if they have any other industry connections or knowledge they can bring to the boardroom. In some cases, the VC may insist on one or two seats on the board that they may then fill with junior associates. Be clear from the start who exactly will fill the seats and what their roles will be.

If you need help with questions to ask investors, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.