Think you’re ready to raise funding? Think again.
Last updated: 2021-05-28 (originally published on 2017-03-20) — by Alex
In the last decade or so, startups have been a hot topic of discussion. We constantly hear about various new edgy startup ideas, and someone or the other at this very moment has probably had his company valued at over a billion dollars. A great example of a startup that has been funded is that of Airwallex, a fintech company located in Australia.
We always question as to how did these lucky individuals get to that stage so fast. A lot of it is hard work, determination and a little bit of Lady Luck. But mostly these individuals would have you know that it is because their legal paperwork was done in a very proper systematic manner and whatever agreements and contracts are in place, they were all airtight from the moment that company started running.
Before even thinking about funding, take a step back and ensure that all your legal documents are in place from the onset.
The ugly truth is that most startups take off at an alarming pace only to crash and burn. In order to mitigate risks and prevent collateral damage, it would certainly be wise to educate yourself on what those risks are and how to prevent damage from happening.
Legal documents have a vital role to play in safeguarding the interests of both, a business and its owners. Ensuring that certain essential documents are in place for your firm right from the get go will not only alleviate stress, but will also have you better prepared to fastback any future business relationships you may consider entering into.
For starters, here are some legal documents that every business should have:
Protecting sensitive information and keeping strategic decisions and company plans under wraps is often vital to the success of a company. However, when discussing the mentioned with friends, family or business partners, every company must have prepared with them a Confidentiality Agreement (or NDA). Under this agreement, the person being addressed is legally bound not to disclose your confidential information to a third party, and may only use that information for a specified reason.
A Shareholders’ Agreement is an agreement between the shareholders of a company and puts forward the key rules as to how the business will be run and the manner in which the shareholders are expected to cooperate, ensuring continuity throughout the life of the company.
An Employment Contract very clearly outlines the obligations and expectations of both, the company and the employee in order to minimise potential disputes. The contract addresses matters of employment such as a probation period, pay, benefits, hours, annual leave, and termination.
Now that your documents are in place, when the time comes for approaching VCs and angel investors – there shouldn’t much back tracking for you to do. If they throw questions or requirements at you, you won’t have the time or bandwidth to figure it out and impress them. This is why it is important to have everything in place before you can even think of funding.
It is also necessary for you to know the terms and conditions attached to the funding and the background of the investors. It is important to make sure that the relationship is mutually beneficial to the investor and the company. Too often, companies sign on with the first party willing to invest without really understanding what it is that the investor can bring to the table for them. Big numbers and valuations mean nothing till there is a promise to work together in a direction that is agreed on by BOTH parties. If you haven’t discussed or planned ahead together, you may regret it in a couple of years.
Legal documents that every business should have when raising finance:
A simple Promissory Note details the terms of the loan and can avoid future disagreements.
Other businesses might be interested in helping you out. In that case, use a Commercial Loan Agreement to set out the terms and conditions of the loan. Sometimes, a director or shareholder decides to lend money, especially when the business is still relatively young and it is not so easy to obtain funding. Then a Loan from Director or Shareholder is the correct document to use. In the case a sister company helps out, you should use an Intragroup Loan Agreement.
You can ask private investors, such as venture capital firms or angel investors, to purchase shares in your company in return for an investment. You will need a Term Sheet, a Seed Investment Agreement, and a Share Certificate if you choose investment through ordinary shares. Alternatively, if the investment is funded through a convertible note, you will need a Convertible Note Term Sheet, a Convertible Note Subscription Agreement, and a Convertible Note Certificate.
A private investor can also invest in your company using a Simple Agreement for Future Equity (SAFE). This is a relatively new concept and is similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding. You will also need a new Shareholders’ Agreement and a Directors’ Resolution to Issue Shares.
The good news is that by adopting the use of the right technology you can be guided through this process all while saving time and cost with a traditional law firm.
Drafting legal documents with the Zegal app feels just like sitting down with a lawyer: