1. Understand the Different Types of Investors

Angel Investors

Angel investors typically invest early in a startup, often during the pre-seed or seed round. These investors might include friends and family who believe in your vision and are willing to support your venture in its nascent stages.

Venture Capital (VC) Investors

Venture capitalists (VCs) usually come into play when your company is more established. They invest money in exchange for equity and will expect certain rights and preferences. This can include board seats, voting rights, and preferential returns in the event of a sale or IPO.

Crowdfunding

Crowdfunding allows startups to raise smaller amounts of money from the general public, typically via online platforms. This method is becoming increasingly popular as it allows you to engage directly with your future customers while raising capital.

2. Documents You’ll Need to Sign

Term Sheet

A term sheet is usually the first document you’ll encounter. It’s typically a non-binding agreement that outlines the terms and conditions of the investment. Other than no-shop and confidentiality provisions, the terms are otherwise not legally enforceable, it sets the stage for the final agreements.

Shareholder Agreements

These documents govern the relationship between the shareholders and your company. They detail rights, obligations, and what happens in various scenarios, such as a sale or dissolution of the company.

Purchase Agreement/Convertible Notes/SAFE/KISS

Depending on the type of investment, you’ll need to draft one or more of these documents. They provide investors with the terms and conditions of their share purchase or set the stage for future equity in your company, such as with convertible notes or SAFE (Simple Agreement for Future Equity) or KISS (Keep It Simple Security) agreements.

3. Valuation and Investment Amount

Your company’s valuation is a crucial number that will be the basis of your investment round. It determines how much equity you’ll need to give up in exchange for the capital. The investment amount is then used to calculate the number of shares distributed to the investors, which will dilute your pre-investment ownership.

4. IP Protection

Before you even think about seeking investment, ensure that all of your company’s intellectual property (IP) is protected. This includes having appropriate agreements in place with employees, independent contractors, and advisors who contribute to your company’s IP. Properly documenting all patents, trademarks, copyrights, and securing trade secrets is essential to safeguard your business.

5. Due Diligence

Due diligence is the process where investors thoroughly review your company’s financials, legal status, and operational structure. This can be an intensive process, so it’s crucial to have all your documents in order before investors begin their review. Financial statements, legal agreements, and operational records should all be up to date and accurate.

Why Seek Legal Counsel Early?

Navigating the investment landscape can be challenging. Engaging legal counsel early in the process can help you avoid potential pitfalls and ensure that your interests are protected. At Momentus Legal, we’re here to guide you through every step of raising capital, from understanding investor types to ensuring all your legal documents are in order.

If you’re preparing to raise capital, don’t hesitate to reach out.

Contact Rayna Sparkes

• Email: rayna.sparkes@momentuslegal.com
• Phone: 541.221.8580
• Linkedin: @RaynaSparkes

Taking the right steps now can set the foundation for a successful investment round and a thriving business. Let’s make sure you’re ready.

Video Transcript for Reference

Are you an entrepreneur looking to raise capital? Here are a few key points to keep in mind, first know your investor. You can have angel investors, venture capital investors or you could go through a crowdfunding platform. Next, prepare your documents. You’ll have a term sheet shareholder agreements and either a purchase agreement or other investment documents that will need your attention throughout your negotiation process. Keep in mind that valuation matters. And before the closing of any investment round, you’ll need to make sure that your IP is protected. Also be ready for due diligence. The investor and their counsel will want to make sure that all of your legal and financial documents are in order. If you want to hear the full breakdown of what you need to know when you’re looking to raise capital, please head over to our blog.

Originally published on August 7, 2024, updated on October 1, 2024.