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50 Questions – What are the different types of instruments VCs use to invest?
Together with Nic Brisbourne of The Equity Kicker / DFJ Esprit, I am writing a series of 50 questions you should ask when raising venture capital. We expect the series to run for a year, after which we will collate the answers into a book. We view this as a collaboration, so please comment to help make this series even more useful. This is #35 in the series.
You won’t be surprised to hear that VCs don’t use banjos, guitars or any other musical instrument to invest, rather we use ‘investment instruments’. Investopedia defines an investment instrument (aka a financing instrument) as “A real or virtual document representing a legal agreement involving some sort of monetary value. In today’s financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset.”
Put slightly differently investment instruments are legal documents which determine how much an investor invests and how much they should get back, when, and under what circumstances.