At some point, every startup will have to start thinking about how to raise capital and distribute equity. There are a variety of agreements and documents that protect the interest of the business as well as the funding team. The potential list for equity documents can be incredibly lengthy and vary based on the type of business and even the equity agreement itself. However, it’s important to familiarize yourself with at least the general documents before a startup attorney can help you select special agreements that are specific to your situation.
Common Equity Documents
Certificate of Incorporation: You may wonder why certificate of incorporation is at the top of the list. After all, most businesses have already established their formation long ago. However, during seed rounds, it is common for amended and restated certificate of incorporation. Sometimes, the business is reorganized to become more attractive to investors while other times it’s simply done so to reorganize in a different state, namely, Delaware since it offers many startup provisions that are attractive to both entrepreneurs and investors.
Investment Term Sheet: The term sheet is a document that outlines the initial agreement. It offers a brief highlight of all the terms included in the outlining documents as well and it may include special terms that don’t always make it to the final agreement, but can offer some areas for negotiation from the very start.
Investors Rights Agreement: This particular document is of great interest to investors. It’s the agreement that outlines the specific rights of the investor which may include participating and voting rights. Overall, it’s designed to protect the investor moving forward.
Convertible Note: To put it simply, a convertible note is a promise to pay a certain amount of equity at a later date. The loan is paid off at certain milestones and will usually include caps or discounts. This is often an agreement that investors choose when a startup wants to hold off on valuation.
If you are interested in crafting equity documents, please reach out to a professional. A startup lawyer can help you identify which documents you need and the appropriate language and terms that should be included. LawTrades is an online legal service that connects clients with the right lawyer for their situation. Because startups are likely to need ongoing legal help, you may also be interested in a legal plan. This option is a subscription-based service that includes unlimited consultations, on-demand communication, and other perks like a $0 service fee