Poor fundraising ideas, lots of legal work, and not enough time to work on your business –these are just a few challenges fundraising poses. They aren’t the most worrying ones though. The perennial issue of having to give away a part of your business that you’ve worked so hard to build now looms larger than ever before. The news is filled with cases where start-up owners have lost their business because they weren’t aware of a minor detail in the agreement. This is why the legality of your contract is so critical – and why it has to be taken seriously. It protects you.
Legal Challenges Faced at Different Stages of Fundraising
Preparing and executing legally binding agreements, such as term sheets and subscription agreements, to document the terms of the fundraising round is crucial. Rather than just look at this stage of the startup funding process as a ‘friends and family’ round, make sure that you enter the business with better term sheets and confirm the stake of every party involved. These are the basics of the startup funding legal process – the legality of your contract at seed funding is critical and must be taken seriously. It protects you in the long run.
1. Board Structure and Control: Startups must carefully consider the structure of their board of directors and how much control investors will have over the company. This affects the ability of the startup to make important business decisions and manage risks.
2. Intellectual Property: Startups must ensure that their intellectual property rights are protected and transferable to investors. This includes evaluating the ownership and licensing of patents, trademarks, and copyrights.
3. Term Sheet Negotiations: A term sheet outlines the key terms and conditions of the investment deal. Negotiating the terms of the term sheet can be difficult, as startups and investors may have conflicting interests.
This is looked at as ‘outside’ startup financing options coming into the business. This is when venture capitalists try to maximise gains at the cost of their equity stake. Make sure you have what was agreed upon in the term sheet.
Series B and onwards
As startups gain traction and begin to earn more revenue, the investment for startups increases too – in terms of magnitude. The more heavily financed the funding round is here, the more rules and regulations matter. Lawyers are needed to draft, review and submit documents that sophisticated investors want.
A How-To-Guide on Tackling Legal Issues When Raising Capital for Startups
What’s Your Fundraising Idea?
Equity funding for startups is different. For example; fundraising ideas for nonprofits tend to be different in terms of strategy. The size, industry, scaling ability and future prospects are to be taken into consideration here. Most startups aim to issue equity shares with only statutory rights at the pre-seed and seed stages. For Series A and beyond, other instruments such as convertible preference shares or debentures, share subscriptions and shareholders’ agreements could be needed. The highlight here should be to understand what you’re getting yourself into. Good lawyers offer help to make their clients understand and strategize.
Comply, Comply, Comply
Understanding that the law is made for one’s own protection rather than looking at it as an inconvenience, one will finally be able to start complying with the rules and regulations when securing investment for startups. Hiring good legal services will help you with corporate secretarial compliance, material contracts, licenses, litigation, insurance, employment, and intellectual property.
Pay attention to the nuances in the final documents. Use all the help you can get to draft term sheets, structure deals, and fix the right company valuation.
Picking The Right Legal Team
Make sure to have a team with experience in term sheet negotiations, licensing, and IP strategies. The longer the experience, the better. Legal counsels who specialize in start-up representation are an added advantage in the startup funding journey.
Protecting Your Startup At Seed Funding
As you’ll notice down the line, following the startup funding legal process ultimately protects your business. In a world where startup financing options are growing by the minute, the protection needed from those making deals is warranted more so than ever. The common complaint with equity funding for startups, whether it involves venture capital or crowdfunding, is not being aware of the negotiation terms. Set aside a small part of your budget and invest in a good legal firm to draw up the essential contracts, and make you understand them. Take their help in anything that you feel you can always know more about; founder’s agreement, employment agreements, vendor contracts, and so on.
Overcoming Personal Challenges
Given the extent of the legal challenges faced when raising capital for startups, it’s no wonder that the journey is tricky. One thing before you start though, how sure are you that now is the right time? Fundraising is important – no doubt – but what is the right time for you? That depends upon your business strategy, vision, and mission. Lawyers advise their clients that fundraising should happen only in deals where the venture is being valued properly. Once you think you have the green light, decide which path of fundraising you want to go down; venture capital, crowdfunding, etc. Brainstorm ideas. Maybe you have a charitable organization, what would be your fundraising ideas for a nonprofit?
Here at Marquee Equity, we understand the kind of back-and-forth thinking that goes along with fundraising for most entrepreneurs. The worst thing you can do is build something out of nothing only to see it taken by accepting terms and conditions which aren’t favourable to you in the long run. This is why we help business owners by giving them direct access to 32,000+ VCs, PEs, Family Offices and Angels to scale their businesses, maintain records that matter, refine their pitches, and so much more. Call +1-213-600-7272 to get started the right way.
We optimize & accelerate growth for already great products.
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