You have a great idea. You have built a product. Now, you need money to grow.
The process of finding a seed investor or venture capitalist (VC) is exciting, but it is not the end. When serious investors come to look at your company, they do not simply judge your market and product. They peep into your house of law. They should understand that your business is clean, well-organized, and legal. This is known as due diligence, and this is where funding transactions are delayed or cancelled.
As a one-year-experienced lawyer who has worked as a paralegal for the past 4 years, I have witnessed many founders lose money because their paperwork is a mess. The investors would want to know that you actually own the idea and that you have a solid foundation on which to build your company.
These 10 documents must be ready before you have even discussed the funding process with big investors; otherwise, you want the funding process to be smooth and fast.
Section 1: The Blueprint of Your Business
These papers demonstrate that your company is legal and exists as a real entity and indicate who the official owner of the company is.
1. Certificate of Incorporation and Bylaws (or Operating Agreement)
This is the birth certificate of your company. The Certificate of Incorporation (or Articles of Incorporation) indicates your registration date and place (typically as a Delaware C-Corp when raising VC funding as a US startup).
- What it proves: That your company exists.
- The internal rulebook is the Bylaws (or Operating Agreement of LLC). They establish the manner in which the company operates: the number of directors, the manner in which you conduct meetings, and the issue of stock.
- My Insight: I have witnessed founders save these files in a folder and forget them. Keep them up-to-date. In case of a change of your company name or address, be sure that the latest versions are easily accessible. To make sure that you were properly established at the beginning of the day, investors will check the date.
2. Capitalization Table (Cap Table)
The most important document of all to the investors, besides your financials, is the Cap Table. It is a spreadsheet or a document that includes all the owners of a part of your company. This includes:
- Founders and their stock shares.
- Initially, stock optioned employees.
- Past investors (such as friends and family).
- The number of available shares.
- What it proves: Who actually owns the company, and how much of the company the investor will own with the money.
- Mistakes to avoid: Check that the number of shares outstanding is equal to your Certificate of Incorporation. When your Cap Table is inaccurate, then the deal is terminated. Investors despise ownership surprises.
3. Intellectual Property (IP) Assignment Agreements
Ideas, code, designs, and brand, the Intellectual Property (IP) of your startup, are often valued. The investors require evidence that this IP belongs to the company, not individuals who made it.
This implies that each founder, each contractor, and each early employee who wrote code or designed the product has to have signed an agreement that will transfer their work to the company and is legally binding.
- What it proves: That the very product that is your core cannot be legally asserted by an ex-employee or freelancer who later discovers that he or she has ownership of the code.
- My Insight: This is a big one. I once spent three weeks searching for an IP assignment for a freelance designer who constructed a first-time logo. Get them signed ahead of time. Otherwise, this will be a huge risk to the investors.
Section 2: The Money and Team History
These documents will examine the history of your funding, the way you deal with big business, and the way you are hiring people.
4. Prior Funding Agreements (SAFE, Convertible Notes, or Prior Stock Purchase)
The investors must be shown those old contracts; in any case, you have already collected money (even small sums on a family basis). This includes:
- Convertible Notes: These are loans that are converted to equity in the future.
- SAFE (Simple Agreement for Future Equity): This is a popular agreement that guarantees future equity.
- Seed Investment: Any previous stock purchase deal.
- What it proves: The portion of the company, which is already owed to old investors, and the precise terms (such as valuation caps or discounts) by which the new investor will own the company. They must be aware of the debt make-up even before they inject more capital.
5. Material Contracts and Agreements
“Material” means important. These are the large corporate transactions that have taken place in your company. This includes:
- Big customer deals that generate huge revenues.
- End-of-life vendor or supplier contracts (where they are crucial to your business).
- Any outside technology is required to be licensed.
- What it proves: Your business relationships are not compromised in terms of law, and your turnover is insured with clear contracts. An investor desires to make sure that your largest customer does not get away without a fine.
6. Employee and Advisor Agreements
Shareholders would like to know that your management takes the project seriously and that there is no chance that a crucial human resource will go off at any given moment to start a rival business.
- Employment Contracts: Basic agreements defining roles, salary, and benefits.
- Non-Disclosure Agreements (NDAs): Indicate that employees and partners are not allowed to disclose company secrets.
- Non-Compete or Non-Solicitation Clauses: Policies that prevent important individuals from creating a competitor firm or from taking your team members immediately after they quit.
- Vesting Schedules: Schemes that demonstrate how founders and employees accumulate their stock with time (typically four years with a one-year cliff).
- What it proves: That you have secured your company culture and secrets. A firm team is an indicator of growth in the future.
Section 3: Compliance and Investment Paperwork
These are the final papers that display to the investor what he or she will be signing and demonstrate that you are acting by the rules.
7. The Final Term Sheet (For the Current Round)
A Term Sheet is a non-binding contract that outlines the key aspects of the deal. Although it is not the ultimate contract, it is the map of the lawyers.
It includes:
- The valuation of the company (how much the company is worth).
- The amount of money being invested by the investor.
- The privileges the investor will enjoy (such as seats on the board or the right to veto some decisions).
- What it proves: That both parties are in agreement about the foundational principles of the investment. Having a clean, clear Term Sheet drafted by your own counsel speeds everything up.
8. Due Diligence Request Response and Company Disclosure
It will be a long list of questions and document requests that the investor will send you, the Due Diligence Checklist. Your answer must be prepared in a plain, systematic virtual data room (as a safe foldering system).
The more significant record is the Disclosure Schedule or Disclosure Letter. This is a form that contains all the exemptions to the promises you have made in the principal investment contract.
- Example: In your contract, it states that the company has never been sued, yet you have a minor complaint on your behalf by a previous vendor, you are supposed to present it here to secure yourself.
- What it proves: That you are honest and cautious. It is far more detrimental to hide a problem as opposed to expose a minor one.
9. Data Privacy, Terms of Service, and Compliance Policies
In the modern business environment, investors are highly concerned about the way you treat customer information. Particularly, it is so when you are working with Europeans (GDPR) or Californians (CCPA).
- Terms of Service (ToS): The regulations for using the product.
- Privacy Policy: The organization of the process of gathering, utilizing, and saving user information.
- Compliance Statement: A document that demonstrates that you are adhering to all the government regulations regarding your industry (such as health, finance, or privacy).
- What it proves: You are not putting the investor in line with huge fines or legal hassles in the future because of bad data management. I have personally observed deals almost falling apart due to poor privacy policies. You also require an effective, current policy that is composed by a professional.
10. Secretary’s Certificates and Board Minutes
These are the official records of the decisions of your company. They demonstrate the fact that all the major steps on the way were officially approved by the people in charge of the company, the board of directors.
- Board Minutes: Documents of all board meetings, including attendance and votes (such as the one to hire a new CEO or to issue shares to a founder).
- Secretary Certificates: Documentation that proves that all the papers of the new round of funding (the sale of stock) were duly approved by the board and signed by the officer in charge.
- What it proves: That the investment is lawful and was authorised by the right people, according to your Bylaws.
Making Your Funding Round a Success
Funding is not only about having a good pitch deck, but making it clear that you are a professional and organized business. Investors will examine your legal organization as a reflection of the care and competence of your management team. In case your legal house is good, they can get down to business, and the growth potential.
You save time and money by making the due diligence process a lot shorter and cheaper by preparing these 10 core documents that keep everyone happy. You gesture trust and readiness.
Get your lawyer on board to begin assembling your data room. Need to understand the major legal distinction between a SAFE and a Convertible Note, or how to find the right way to structure your vesting schedule, I can help!
Sources:
- Corporate law texts are regulated by the state law (e.g., Delaware General Corporation Law, or DGCL) and federal securities regulations.
- Standard agreements tend to be quoted by investment terms, often based on the National Venture Capital Association (NVCA) model documents.
