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What Legal Documents Do You Need Before Raising Capital?

Raising capital is an exciting milestone for any business, but it also comes with legal responsibilities. Before you approach investors, it's crucial to have the proper legal documents in place to protect your company and ensure compliance with securities laws. Here are the key legal documents you'll need to prepare: Legal clarity can benefit from a Employment Contract.

Incorporation Documents

If you haven't already done so, you'll need to incorporate your business. This typically involves filing articles of incorporation with your state's secretary of state office. You'll also need to have bylaws, which outline the rules and procedures for governing your corporation. These documents establish your company's legal structure and lay the foundation for future operations. You can find templates for and on our website.

Capitalization Table

A capitalization table, or cap table, is a spreadsheet that shows the ownership structure of your company, including the number of shares issued, outstanding, and reserved for future issuances. This document is essential for investors to understand the company's equity distribution and potential dilution. You can find a on our website.

Investor Rights Agreement

An investor rights agreement outlines the rights and obligations of investors and the company. It typically includes provisions for information rights, registration rights, and protective provisions. This document is crucial for protecting the interests of both the company and its investors. You can find an on our website.

Stock Purchase Agreement

A stock purchase agreement is a contract between the company and the investors that outlines the terms and conditions of the investment. It includes details such as the purchase price, number of shares being issued, and any representations and warranties made by the company. This document is essential for ensuring a clear understanding between all parties involved in the investment. You can find a on our website.

Private Placement Memorandum (PPM)

A private placement memorandum (PPM) is a legal document that provides detailed information about the investment opportunity, including the company's business plan, financial statements, risk factors, and use of proceeds. This document is required by securities laws and is essential for ensuring that investors have access to all material information before making an investment decision. You can find a on the SEC's website.

Subscription Agreement

A subscription agreement is a contract between the company and each individual investor that outlines the terms and conditions of their investment. It includes details such as the number of shares being purchased, the purchase price, and any representations and warranties made by the investor. This document is essential for ensuring that each investor is bound by the same terms and conditions. You can find a on our website. This is often governed by a SaaS Agreement.

Compliance with Securities Laws

In addition to the legal documents mentioned above, it's crucial to ensure that your capital raise complies with federal and state securities laws. Depending on the type of offering and the investors involved, you may need to file certain forms with the Securities and Exchange Commission (SEC) or seek an exemption from registration requirements. You can find more information on and on the SEC's website. This is often addressed through a Technology Licensing.

While this list covers the essential legal documents, it's important to note that every capital raise is unique, and additional documents or modifications may be required based on your specific circumstances. It's always advisable to consult with legal counsel to ensure that you have all the necessary documents in place and that you are fully compliant with applicable laws and regulations.

Do you need a term sheet?

A term sheet is a critical document that outlines the key terms and conditions of an investment deal. If you're seeking funding from venture capitalists, angel investors, or other professional investors, you'll almost certainly need a term sheet. It serves as a blueprint for the definitive legal agreements and helps align expectations between you and potential investors.

While not legally binding, a well-crafted term sheet can save you significant time and legal fees by clearly defining key terms upfront. It typically covers items like valuation, investment amount, investor rights, and governance. Refer to resources like or for more information.

What's the difference between SAFE and convertible note?

A SAFE (Simple Agreement for Future Equity) and a convertible note are both ways for startups to raise early funding from investors. However, they differ in how the investment is structured:

A is a short-term debt instrument that converts into equity at a later date, typically when the startup raises a priced round. A , on the other hand, is not a debt instrument but represents a future equity stake in the company, triggered by specific events like an equity financing or liquidity event. A common solution involves a Board Resolution.

SAFEs are generally simpler and less expensive to administer than convertible notes, but may have different tax implications. It's advisable to consult with a startup lawyer to understand the pros and cons for your specific situation.

Should you use a lawyer or template?

When raising capital, it's crucial to have the proper legal documents in place. While templates can provide a starting point, they may not fully address your specific needs or comply with all applicable laws. Consulting a qualified lawyer is highly recommended, especially for complex transactions or jurisdictions with unique regulations.

An experienced startup lawyer can tailor the documents to your situation, ensure compliance, and provide valuable guidance throughout the process. However, for early-stage startups on a tight budget, using reputable templates from sources like , , or can be a cost-effective starting point before engaging legal counsel.

What's typical in a Series A?

In a Series A financing round, startups typically raise between $2 million to $15 million from venture capital firms or angel investors. The key legal documents involved are the , , and . These outline the terms of the investment, investor rights, and governance. It's wise to consult a startup lawyer to ensure your interests are protected.

How do you protect my control?

As a founder, maintaining control over your company is crucial, especially when raising capital. To protect your control, consider implementing protective provisions in your charter documents, such as a voting agreement that gives you control over board seats. Additionally, issuing different classes of stock (e.g., super-voting shares) can help you retain voting power. Consult resources like the or the for more information on structuring your company's equity and governance.

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