Here are five legal considerations you should take into account before and during your fundraising efforts.
1. Have a funding structure in mind.
While you should not put terms in your pitch deck, you want to know which way to lean: convertible debt or equity terms, and understand the points why which is better. Putting terms in your pitch deck is problematic because it can be viewed as an offer to invest by the SEC and so subject to additional requirements. Many investors also don't like it (see Equity Funding Regulations | Avoid This Mistake).
2. Have a set of terms in mind.
As part of considering the structure, it's good to know what the “good” and “bad” are of each. Out of those decisions come next-steps terms such as valuation, incentives consideration, vesting, taxes, voting, follow-ons. All of these things play a part in setting up your startup for success.
3. Prepare your diligence.
Are there any unsigned agreements in the files? Has everyone signed all of their consulting and employee paperwork? Is there anything missing, and what are the options to approach that or fix it? Is the cap table registered with a transfer agent and how are the stock certificates administered? Like a well-tuned bike, a startup works better with maintenance. Your investors will need you to have all of these things maintained and organized; be sure to fix any problems before your ride begins.
4. Know the process.
What's going to be asked of the director(s)? What will need to be done by the stockholders? What's the time frame and process? What gets filed with the SEC versus in California or Delaware? These are things you need to know. It's good to be prepared for the expected.
5. Get a good advisor.
You wouldn’t go on a trek in foreign territory without a guide. Those that know this process "full-stack" are hard to find. But a good sherpa can help you prepare and help carry the load along the way.
Questions? Write comments here or get in touch with me via LinkedIn.
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Peter Szymanski is an attorney and the founder of Silicon Valley Counsel.