Ensuring Legal Preparedness: A Vital Step Before Seeking Investment for Your Business

In the dynamic world of entrepreneurship, seeking investment can be a pivotal milestone for scaling a business. However, amidst the excitement of growth prospects, ensuring legal readiness often takes a backseat. For any business eyeing investment, laying down a robust legal foundation is not just a formality but a strategic necessity.

If your business is ready for expansion and you’re thinking about investment, are you legally prepared for it and do you know what an investor might want to see? Here’s a high-level guide on what your business needs to have in place before diving into the world of investment.

The Key Legal Documents

When gearing up for a seed round, several legal agreements become pivotal to secure funding and protect the interests of both the business and the investors.

Agreements for onboarding investors:

1.???? Term Sheet

This serves as a (mostly) non-binding agreement outlining the terms and conditions of the investment. It covers essential aspects such as valuation, investment amount, ownership stake, rights of investors, confidentiality rights, due diligence procedures and key milestones. Usually, an investor will prepare a Term Sheet and share it with the potential investee.

2.???? Non-Disclosure Language

An investee may request the investors to sign a non-disclosure agreement, although this may not always be possible or welcome at the pitching stage. It is therefore paramount for an investee to narrate its story without giving away any secrets. Once an investor has indicated that it is ready to proceed the investee can ensure that non-disclosure language is included in the funding documents.

Main legal documents during an early-stage funding round:

1.???? Share Subscription Agreement (SSA) and Investment Agreement

This agreement formalises the terms set forth in the term sheet and outlines the terms of the subscription of shares or other securities by the investors. It includes details on the number of shares/securities subscribed, the price per share/security, conditions of subscription,

2.???? Shareholders’ Agreement

This agreement governs the ongoing relationship between shareholders i.e., the rights and obligations of the shareholders. Additionally, it may cover matters related to voting rights, transfer restrictions, and anti-dilution protections.[GD1]?

3.???? Founder Agreement or Vesting Agreement

This outlines the roles, responsibilities, equity stakes, and vesting schedules of the founder. It’s crucial for clarifying the expectation, from each founder and ensuring alignment with the company’s growth trajectory.

4.???? Shareholder and Board Resolutions and Consents:

Every company is governed by its Articles of Association which is its constitutional document. As per its Articles, as well as legislation, a company may have to seek shareholders’ approval before it can implement certain decisions. This is done by way of shareholders’ resolutions. Even while seeking investment, it is crucial for company directors to ensure that relevant resolutions have been passed by the company’s shareholders.

5.???? Intellectual Property Assignment

This ensures that ownership of[GD2]? intellectual property is vested in the right party. Ideally ownership should be transferred to the investee company.

Each of these agreements plays a pivotal role in solidifying the relationship between the business and its investors, clarifying expectations, protecting assets, and establishing a framework for governance and decision-making. As a business progresses through subsequent rounds of funding, these agreements may evolve in complexity and scope, to accommodate the changing needs and interests of both the company and its stakeholders.

Getting Your House In Order

It is also important to? ensure you have the following in order to ensure preparedness:

1.???? Compliance with Regulations

Understand and comply with industry-specific regulations and legal requirements. Compliance issues can pose significant risks during investment due diligence.

2.???? Financial Documentation and Records

Maintain accurate financial records and documentation. Having clean and organised financials is crucial during the due diligence process.

3.???? Risk Assessment and Mitigation

Identify potential legal risks and develop strategies to mitigate them. Address any ongoing or potential litigation, liabilities, or pending legal issues proactively.

4.???? Governance and Reporting Structures

Establish strong governance and reporting structures. Define roles, responsibilities, and reporting mechanisms within the organisation to ensure transparency and accountability.

5.???? Exit Strategy and Investor Rights

Outline an exit strategy and ensure that investor rights are clearly defined. This includes provisions for potential buyouts, IPOs, or acquisitions.

6.???? Legal Support

Engage with an experienced lawyer and advisors specialising in business investments. Their expertise will prove invaluable in navigating legal complexities and ensuring compliance.

Building a Strong Legal Foundation

Before diving headfirst into the investment landscape, businesses must recognise that a robust legal framework is not just about ticking boxes; it's about building a resilient foundation. Investors seek businesses that are not only innovative and profitable, but also legally sound and well-prepared for the challenges of scaling. Taking proactive steps to address legal aspects demonstrates a commitment to long-term success and mitigates risks, instilling confidence in potential investors.

Remember, getting legally ready for investment is not a one-time checklist; it's an ongoing process that evolves with your business. By prioritising legal preparedness, you not only pave the way for successful fundraising but also set the stage for sustainable growth and resilience in the competitive business landscape.

In conclusion, investing time, effort, and resources into ensuring legal readiness before seeking investment is a strategic imperative that lays the groundwork for a successful and enduring business journey.

Disclaimer

The information provided in this article is intended informational purposes only and is not legal advice or a substitute for it, which should be sought by every individual in light of their individual/unique requirements. Readers should consult their own legal advisors to discuss their particular circumstances. The DLC makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of The Daswani Law Co.