Glossary

Agreement in Principle

Definition

An agreement in principle refers to a non-binding agreement between a venture capital firm and a startup. It outlines the basic terms and conditions of a potential investment. While not legally binding, this agreement serves as a preliminary understanding between the parties involved.

Frequently Asked Questions

Q: What is the purpose of an agreement in principle?

A: The purpose of an agreement in principle is to establish a preliminary understanding between a venture capital firm and a startup regarding the basic terms and conditions of a potential investment. It allows both parties to outline their expectations and intentions before proceeding further.

Q: Is an agreement in principle legally binding?

A: No, an agreement in principle is not legally binding. It serves as a starting point for negotiations and provides a framework for the potential investment. Legally binding agreements, such as investment contracts, are typically drafted and signed after the agreement in principle is established.

Q: What are the key elements included in an agreement in principle?

A: An agreement in principle generally includes key elements such as the investment amount, ownership percentage, valuation of the startup, proposed terms, conditions, and any specific requirements or expectations from both parties. These elements provide a foundation for further negotiations.

Q: Can either party back out of an agreement in principle?

A: Yes, since an agreement in principle is non-binding, either party has the freedom to back out without legal consequences. It allows flexibility for both parties to reassess their positions or negotiate different terms before committing to a binding agreement.

Q: What happens after an agreement in principle is established?

A: After an agreement in principle is established, both parties can proceed with due diligence, which involves a detailed examination of the startup's financial, legal, and operational aspects. If the due diligence process is successful and all parties are satisfied, a legally binding investment contract can be drafted and signed.

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