A strong pitch deck is only part of what investors consider. Before investing, they will want to know that your company is properly set up, its ownership is clear, and its important legal documents are in place.
This article explains the key steps that startups need to take to get the right legal foundations in place.
1. Get your cap table in order
Your cap table shows who owns the company, how many shares each shareholder holds and how a new investment will affect the existing ownership structure.
Investors will use it to understand who already has an interest in the company and how much of the business they will own after investing. It therefore needs to be accurate and up to date.
Check that your cap table is consistent with the company’s register of members, share certificates, previous share documents, and relevant Companies House filings, and resolve any discrepancies before taking investment.
Mistakes can become harder to correct after a funding round, particularly if fixing them requires further shares to be issued or transferred. Issuing shares to founders, directors or employees can result in an unexpected tax charge if they are acquired for less than their market value.
2. Sign a Founders’ Agreement
Founder relationships often begin informally. Important decisions about roles, ownership, and what happens if someone leaves are usually put off until later.
This can lead to problems when founders have different expectations about their responsibilities, commitment, or shareholdings.
A Founders’ Agreement should set out the key terms of the relationship, including:
- Each founder’s role and responsibilities;
- How decisions will be made;
- How much time each founder is expected to commit;
- How the shares are divided; and
- What happens if a founder leaves.
Vesting and leaver provisions are particularly important. They can prevent a founder from leaving early with all the shares they were expected to earn by continuing to build the business.
This does not mean that an early-stage company needs a lengthy Shareholders’ Agreement. A more detailed Shareholders’ Agreement will often be introduced later, particularly when the company takes significant investment. At the beginning, the priority is to record the essential agreement between the founders.
3. Make sure the company owns its intellectual property
Investors will expect the company to own the product, technology, and brand they are investing in.
However, some of the startup’s most valuable work may have been created before the company existed or by freelancers who never transferred their rights to it. In those circumstances, the founder, freelancer or agency may still own the intellectual property rather than the company.
Paying someone to create work does not automatically transfer ownership. A self-employed creator will usually retain the intellectual property unless the contract transfers it to the company.
Review everyone who has contributed to the business, including founders, developers, designers, consultants, and agencies. Where necessary, they should sign an intellectual property assignment transferring the relevant rights to the company.
Employment and consultancy agreements should also contain clear intellectual property provisions, particularly where the individual is contributing to the company’s product or technology.
SuLe’s template library includes an IP assignment agreement for founders and contractors, as well as employee confidentiality and IP provisions. The documents can be adapted using SuLe’s Smart Contract Reviewer, with the option to ask a SuLe lawyer to review them.
Before approaching investors, make sure you can answer one question clearly. Does the company own the product it is asking them to fund?
4. Sign the correct agreements with employees and consultants
Investors may also check whether employees, consultants, and other key team members have signed appropriate agreements with the company.
These agreements should clearly cover the person’s role, payment, confidentiality, intellectual property, and what happens when the arrangement ends. Any shares or options they receive should also be documented separately.
Employees and consultants should not be given the same agreement with a different title. Their roles, rights, and working relationships are different, so the agreement should reflect how the person actually works with the company.
This is particularly important for developers, designers, and other contributors who create valuable intellectual property. A contractor will usually retain ownership of their work unless a written agreement transfers it to the company. SuLe’s template library includes employment contracts and independent contractor agreements. Founders can adapt the documents using the Smart Contract Reviewer and ask a SuLe lawyer to review them when additional support is needed.
5. Prepare the right funding documents
Once an investor is ready to invest, the arrangement needs to be documented properly.
Early-stage startups need to decide between two funding structures.
Issue shares directly
The investor pays for shares that are issued immediately. The company and investor will need to agree on the valuation, price per share, number and class of shares, and any rights attached to them. The company must also approve the investment, update its records, and make the required filings.
This option is suitable when the valuation and investment terms are ready to be fixed, and there is no compelling reason to delay issuing shares until a later point in time.
Use an advance subscription agreement
An advance subscription agreement, or ASA, allows an investor to provide money now in exchange for shares issued later.
This can be useful when the company needs funding before it is ready to agree a valuation or complete a larger funding round. HMRC describes an ASA as a way for investors to provide subscription funds at an early stage, with the shares issued later.
The ASA should explain when the shares will be issued and how the investor’s entitlement will be calculated. It is not a loan because the investor is paying in advance for shares rather than expecting the money to be repaid.
The right option will depend on the timing of the investment, the proposed terms, and whether the company is seeking SEIS or EIS treatment.
