7 Legal Must-Haves for Tech Startup Fundraising

Seven important steps for your international setting

1. Set Up a Delaware C-Corporation: Investors prefer this structure for its flexibility and legal clarity.
2. Protect Your IP: Secure patents, trademarks, copyrights, and trade secrets. Ensure all IP is owned by the company.
3. Organize Investor Agreements: Use SAFEs, convertible notes, or purchase agreements based on funding stage.
4. Comply with Securities Laws: File required forms (e.g., SEC Form D) and follow federal and state regulations.
5. Prepare for Due Diligence: Organize corporate records, financials, contracts, and IP documents in a secure data room.
6. Define Shareholder Rights: Clarify board roles, voting rights, anti-dilution provisions, and exit strategies.
7. Communicate Clearly with Investors: Provide accurate financials, projections, and regulatory updates.

Quick Overview:

Legal AreaKey FocusBusiness StructureDelaware C-Corp, bylaws, EINIntellectual PropertyPatents, trademarks, NDAsInvestor AgreementsSAFE, convertible notes, equity termsSecurities ComplianceSEC filings, state law adherenceDue DiligenceOrganized records, secure data roomShareholder RulesVoting, transfer, anti-dilutionInvestor CommunicationTransparent updates, trust-building

Pro Tip: Legal preparation builds trust, avoids delays, and sets you apart from competitors. Get it right early.

Legal Aspects of Raising Financing

1. Business Structure Setup

For tech startups, forming a Delaware C-Corporation is often the go-to choice. It provides flexibility with stock, clear corporate governance, and operates under well-established business laws.

"VCs and angel investors will only invest in Delaware C-Corporations. Period." - Rajeev Behera, CEO of Every

Incorporation Steps

1. Initial Filing Requirements
   • Choose a registered agent in Delaware.
   • File the necessary paperwork with the Delaware Secretary of State.
   • Create a capitalization table.
   • Obtain an Employer Identification Number (EIN) from the IRS.
2. Stock Structure Setup
   • Authorize enough shares to accommodate future growth.
   • Set up vesting schedules for founder shares.
   • File 83(b) elections within 30 days of stock purchase to manage tax treatment effectively.

Required Legal Documents

Document TypePurposeKey ComponentsCertificate of IncorporationEstablishes the company's existenceShare authorization, corporate purposeCorporate BylawsSets operational rulesGovernance structure, voting rightsBoard Action by Unanimous Written ConsentApproves initial corporate actionsOfficer appointments, stock issuanceFounder Common Stock Purchase Agreement (SPA)Outlines founder equityVesting terms, transfer restrictionsProprietary Information and Inventions Agreement (PIIA)Safeguards intellectual propertyIP assignment, confidentiality terms

Post-Incorporation Steps

• Allocate equity based on your cap table.
• Finalize intellectual property assignment agreements with all founders.
• Establish a virtual data room for secure and organized document storage.

Tax Considerations

Filing the 83(b) election with the IRS within 30 days of stock issuance is critical for managing the tax implications of founder shares. Proper documentation and timely filing not only optimize tax outcomes but also help build investor confidence, making future fundraising smoother.

2. Setting Up Investor Agreements

When bringing in investors, it's crucial to have clear agreements that protect both your startup and its backers. The type of agreement you choose will depend on your funding stage and what your investors prefer. Below are some common options to consider based on your startup's needs.

Common Agreement Types

Each funding stage often aligns with specific types of investment agreements. Here's a quick comparison:

Agreement TypeBest ForKey FeaturesSAFE (Simple Agreement for Future Equity)Pre-seed/SeedNo maturity date or interest; converts to equity in a future funding round.Convertible NoteEarly-stageIncludes a maturity date and interest rate; converts to equity or requires repayment.Share Purchase AgreementSeries A+Direct equity purchase with detailed investor rights and obligations.Subscription AgreementAny equity roundOutlines share quantity, pricing, and purchase conditions.

Once you've chosen the right agreement type, make sure to include the essential terms outlined below.

"Convertible instruments offer potential benefits for both the investor and the company, such as the ability to convert debt into equity at a later date and providing protection for the investor in case of a down round." - Daria Kurishko, startup legal expert

Required Agreement Terms

Investor agreements should cover these critical areas:

1. Valuation and Investment Terms
   Clearly define the investment amount, company valuation (or cap), and how the investment converts into equity. For convertible notes, include details like interest rates and maturity dates.
2. Investor Rights
   Outline protections such as:
   • Access to financial statements (information rights)
   • Pro-rata rights to participate in future funding rounds
   • Board observation rights
   • Voting rights on major decisions
3. Transfer Restrictions
   Address how shares can be transferred with provisions like:
   • Right of first refusal on share sales
   • Co-sale rights
   • Lock-up periods
   • Drag-along and tag-along rights
4. Anti-Dilution Protection
   Explain how future funding rounds will affect ownership. Include options like:
   • Full ratchet or weighted average anti-dilution provisions
   • Pay-to-play clauses
   • Employee stock option carve-outs

For venture capital deals, these terms are often introduced in a term sheet before being formalized in the final agreements. Well-crafted investor agreements not only safeguard all involved but also help build trust and credibility with future investors.

3. Securities Law Requirements

Tech startups need to follow securities regulations when raising capital. These rules form a key part of your legal strategy for fundraising.

SEC Filing Requirements

When raising money through securities offerings, startups must submit specific forms to the SEC. Regulation D is often used as an exemption, with these key filing requirements:

Filing RequirementDeadlineKey DetailsForm D NoticeWithin 15 days of first saleFile electronically via EDGARAnnual AmendmentEvery 12 monthsNeeded if the offering lasts over a yearForm ID ApplicationBefore first filingRequired to get EDGAR access credentials

In addition to federal requirements, startups must comply with state securities laws, known as "blue sky laws." These vary by state, requiring separate filings and fees.

Investor Restrictions

Under SEC regulations, consider these investor limitations when raising funds:

• Accredited Investor Rules: Securities laws often restrict who can invest, based on:
  • Income thresholds (over $200,000 annually or $300,000 for joint filers)
  • Net worth requirements (over $1 million excluding primary residence)
  • Professional certifications or entity qualifications
• Solicitation Limitations: Regulation D offerings may restrict public advertising based on the exemption you're using.

Track these legal requirements carefully to avoid penalties.

4. Intellectual Property Protection

Your startup's intellectual property (IP) might be its most valuable asset. Strong IP security reassures investors that you're safeguarding what makes your company special. Here's a breakdown of the key IP protection strategies for tech startups.

Types of IP Protection

IP TypeWhat It ProtectsDurationProcessPatentsNew inventions and processes20 years from filingFile with USPTO; requires novelty and non-obviousnessTrademarksBrand names and logos10 years, renewableUSPTO registration after search for existing marksCopyrightsSoftware code, contentAuthor's life + 70 yearsAutomatic, but register with US Copyright Office for legal benefitsTrade SecretsConfidential business informationAs long as secrecy is maintainedImplement security measures and confidentiality agreements

IP Assignment Documents

Clear ownership documentation is crucial for startup IP. Make sure these agreements are in place:

1. Founder IP Assignments: Ensure all IP created before company formation is transferred to the business.
2. Employee IP Agreements: Have new hires sign agreements that:
   • Assign all work-related IP to the company
   • Acknowledge company ownership of innovations
   • Include clear confidentiality terms
   • Address previous employer obligations
3. Contractor IP Assignments: Independent contractors need specific agreements stating that:
   • Their work product is owned by the company
   • The work constitutes "work-for-hire" when applicable
   • All IP rights are explicitly transferred to the company

"Getting proper IP assignments is one of the most common issues that comes up in fundraising. If you can't show clean ownership of your core technology, many investors won't proceed." - Tech Startup Attorney

Address these IP concerns proactively to avoid complications during due diligence.

5. Due Diligence Preparation

Investors will scrutinize your startup's legal, financial, and operational details before committing funds. Being well-prepared for due diligence can accelerate the fundraising process and build investor confidence.

Essential Due Diligence Documents

Organize these documents in a secure virtual data room:

CategoryDocuments to PrepareCorporateCertificate of incorporation, bylaws, board minutes, stock ledgerFinancialFinancial statements, tax returns, financial projectionsIntellectual PropertyIP registrations, assignments, licensing agreementsCommercialCustomer contracts, vendor agreements, partnership dealsEmploymentEmployment agreements, option plans, contractor agreementsLitigationPending or threatened lawsuits, settlement agreements

Data Room Organization

Set up a well-structured virtual data room with these features:

• Document-level security permissions
• Watermarking capabilities
• Activity tracking and reporting
• Clear folder organization and document naming
• Search functionality

Having this in place before approaching investors demonstrates professionalism and helps maintain control over sensitive information.

6. Shareholder Rights and Governance

As you raise capital, your investor agreements will define the rights and responsibilities of shareholders. It's crucial to carefully consider these terms since they'll impact company control and future fundraising.

Key Protective Provisions

Investors typically request provisions that give them say over major company decisions. You'll need to negotiate:

1. Board Representation Rights
   • How many board seats investors receive
   • Observation rights for certain shareholders
   • Approval thresholds for key decisions
2. Information Rights
   • Financial statement delivery schedule
   • Access to management and records
   • Required disclosures of material events
3. Anti-Dilution Protection
   • Full-ratchet vs. weighted average adjustments
   • Broad-based vs. narrow-based formulas
   • Pay-to-play provisions (requiring participation in future rounds)

Exit Strategy Considerations

Funding agreements should address how shareholders might eventually see returns:

Exit MechanismPurposeConsiderationsLiquidation PreferencesDefines payout order in a sale/liquidationMultiple (1x, 2x, etc.), participation rightsDrag-Along RightsForces minority shareholders to join a saleThreshold percentage, price minimumsTag-Along RightsAllows minority shareholders to join a salePro-rata participation, timingRedemption RightsLets investors request share buybackTimeframe, triggering events

"Terms that seem standard in the moment can come back to haunt you. Think through the implications of each provision on future rounds and potential exits." - VC Partner at Tier-1 Firm

While it's important to secure funding, be careful about agreeing to overly restrictive terms that could limit your flexibility down the road. Balance investor protection with your need for operational freedom.

7. Investor Communication Strategy

A thoughtful investor communication plan helps build trust and maintains compliance with securities laws. It should address what, when, and how to share information.

Reporting Standards

Create a consistent reporting schedule with these elements:

• Financial Updates
  • Monthly financial summaries
  • Quarterly financial statements
  • Annual audited reports (when applicable)
  • Cash runway projections
• Operational Updates
  • Key metrics dashboard
  • Product development milestones
  • Team changes and hiring plans
  • Market developments
• Strategic Communications
  • Fundraising plans and progress
  • Partnership announcements
  • Pivot discussions (when relevant)
  • Competitive landscape changes

Handling Material Information

When sharing significant company news, follow these practices:

1. Ensure equal access to material information across investor groups.
2. Maintain records of all formal investor communications.
3. Implement approval processes for public statements.
4. Use non-disclosure agreements when discussing sensitive topics.

Regular, transparent communication with investors not only meets your legal obligations but also builds their confidence in your leadership. This can make future fundraising rounds smoother and more successful.

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