The Legal Side of Startup Fundraising

Creating a startup is an exciting journey. There is just one problem. Getting the project off the ground will require a lot of money. Some smart startup fundraising ideas are needed to get the capital you require. But the thrill of bringing an investor on board can turn into a nightmare if you don’t follow the correct legal procedures. To stop this from happening to you, let’s run through the basic legalities of startup fundraising. 

Getting Your Documents in Order

Before you can start fundraising, you need to get your paperwork in order. This allows prospective investors to make an informed decision about whether to invest in your business. This can be a long process. But a good startup fundraising consultant can help walk you through it. The list of documents to prepare will include:

• Business plan. This is about more than just outlining how you will build a profitable company. It’s a chance to delve deeply into your strategy. You can outline potential hurdles you will face and how you plan to overcome them. This needs to be a very comprehensive document. Legally, it needs to contain all the information that a reasonable person might want to know before investing. 
• Executive summary. Your business plan will be a lengthy document. Investors might not have the time to read through it all. An executive summary is just a few sentences, summing up your business and explaining why investors should fund you. It’s a way of whetting people’s appetite, so they are keen to learn more about your company. 
• Pitch deck. If an investor is curious enough, they will want to meet up and discuss your proposal. Your pitch deck is the presentation that you’ll be giving. It should contain all the key details from your business plan.  

These documents are a good place to start. But most investors will want to do a period of due diligence. This is where they investigate the company themselves. For example, they might ask for things like your data protection policy or to take a detailed look at your accounts. Expect this process to last for a few weeks. 

Deciding The Right Type of Fundraising for Your Business

Once you have the basic documents in place, you can begin to gather money. There are plenty of startup fundraising ideas you can explore, these include: 

• Crowdfunding. Several platforms allow you to pitch your business idea directly to the public. These campaigns can be quite successful, raising thousands of dollars. But people aren’t going to give away their money for free. They’ll usually expect some merchandise or a prototype product. 
• Convertible notes. Many startups prefer to attract investors. They tend to have deep pockets and can contribute a significant amount of money. Typically, though, they expect equity in return, allowing them to own a portion of the company. A convertible note allows investors to give funding immediately, with the expectation that they will receive shares in the future. These come with a maturity date and may charge interest. 
• SAFEs. These are similar to convertible notes. They allow investors to purchase equity in the company. But they don’t have maturity dates and won’t charge interest. This makes them easier to negotiate and gives startup founders more flexibility. 
• Selling shares. If your company has already gone through a few rounds of funding, you might be able to offer shares to new investors. This can help you attract more substantial funding, as investors will know your business valuation.  

Creating a Term Sheet and Share Capitalization Table

Before you accept any money from investors, there are a few legal hurdles to jump through. The first is creating a term sheet. This outlines the conditions that you need to meet before an investor will give you their money. It pays to have a startup fundraising consultant go through this document with you. Though these aren’t legally binding, it’s still a good idea to have a clear idea of your obligations. 

Next, ask your startup fundraising advisors to help you create a share capitalization table. This is a way to track who holds equity in your business and what percentage of the company they hold. Giving away too many shares can mean that you lose control over the business. 

Receiving The Funds

After working your way through your startup fundraising checklist, you should be almost ready to receive the funds. Remember to always check with a lawyer before signing any documents. Make sure that you understand your legal responsibilities and that there are no nasty clauses hidden in the agreements. 

Your legal obligations don’t end when the money hits your account. Misusing money can bring fraud charges and lead to serious legal penalties. Given this, it’s a good idea to put a good account-keeping team in place. 

Conclusion

Startup fundraising should be an exciting time. You’ll be taking one step closer to bringing your idea into reality. Just make sure to keep your lawyer close and have them look over any documents before you sign. This should stop you from making any legal mistakes that could derail your startup.