There is a lot of work that goes into getting that first investor. Angel funding is often considered the toughest round of fundraising, and for good reason: your idea is likely still unproven by the time you approach your first investor for startup capital.
This being the first time that you raise funds, you will naturally spend a lot of effort perfecting your pitch, doing your research, and formulating exactly what your potential value proposition is. All of those items are specific to your startup and your team. We are here to help with the rest, however.
A large part of how to get investors is not so much about your ideas and business plan, but more about having all your ducks in a row, legally speaking. Investors are not interested in funding startups that are not properly set up and protected from a legal point of view. Here is a quick overview of the legal to-dos you should finalize before raising funds.
Do not even consider raising funds before your company has been properly incorporated and set up. Investors are almost exclusively interested in investing in Delaware Corporations. If you started out as an LLC, or another entity, you should convert to a Delaware Corporation before raising startup capital.
In addition to incorporation, you should ensure finalization and proper filing of all relevant post-incorporation documents. This includes formal matters such as your 83B election filings, stockholders agreements, and capitalization tables, as well as informal structural certainty such as organizational charts, job descriptions, and lines of reporting. Many of these features seem unnecessary when you start out, but they are a key part of projecting competence in the angel funding round.
After you reach the point in your negotiations where an investor offers you a term sheet, you will have to go through a due diligence process before any funding will be formalized. As part of due diligence, investors will want to ensure that your startup is contractually protected. It is best to have all contractual arrangements vetted and formalized before getting to the due diligence stage, therefore. This includes:
- Ensuring that employment agreements are formalized and standardized, and that they include intellectual property assignment, non-compete, and non-disclosure clauses.
- Having a clear directory of all material contractual arrangements. This would include, for example, contractual arrangements relating to leases, loans, licenses encumbrances, contractors, and advisors.
Especially in early rounds of funding, startup capital goes toward the development and improvement of your unique value proposition. In almost all cases, this value proposition lies in your company’s intellectual property – whether it is your inventions, designs, or brand. For that reason, you should not start raising funds before you are able to ensure investors that you have a robust intellectual property portfolio. This will include, depending on your situation:
- Proof of all necessary assignment agreements
- Proof that the intellectual property has been transferred from founders/earlier entities to the corporation
- Provisional patent filings
- Trademark filings
- Copyright registration
Hire an Experienced Startup Attorney
There’s a lot of legal considerations to take into account before seeking your first investment. The laundry list of to-dos is not only extensive and time consuming – the stakes are also high. Let our legal experts help you get everything in order while you focus on what you do best: managing your business’s success and growth.