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You’ve built your team, perfected your pitch and pitch deck, determined your target raise, and used warm introductions to schedule meetings with your ideal early stage investors.
Now what?
First, educate yourself. Here are some awesome, free resources on the fundraising process:
Second, if your company hasn’t already, engage a lawyer familiar with startups and raising money. Your lawyer should ensure you’ve taken care of key early stage legal issues and help you navigate raising money. I understand that you are not excited to pay a lawyer from your hard-earned fundraising dollars, but this is not an area to DIY.
If a business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with an exemption. In short, issuing securities involves compliance with federal and state regulation.
Failing to comply with securities laws can be disastrous. Investors in the offering would have a right to rescind their purchase and get their money back along with damages. In worst case scenario, a fraud claim could result in criminal liability. If there is not an available exemption, or you do not have the time or money to file all the applicable forms and pay the required fees, your company should not issue securities.
To try to ease the burden of legal fees, here are two suggestions that ought to result in more efficient work from your lawyer: (1) only raise funds from accredited investors and (2) work from a pre-existing, vetted template.
Accredited Investors
A key concept in securities regulation involves accredited investors. Issuing securities to an accredited investor makes it more efficient to raise money because more exemptions with less disclosure requirements are available. These individuals are viewed by the SEC as so financially sophisticated that they do not need all of the protections afforded by the securities laws.
In contrast, a company should try to avoid raising from non-accredited investors because it will limit the exemptions that can be relied upon by creating significant disclosure requirements that are often too expensive for a young company. From a personal standpoint, there is a greater potential to harm relationships when dealing with a non-accredited friend or family member that is less able to bear the total loss of their investment. Finally, sophisticated investors in later rounds do not like numerous non-accredited investors on a company’s cap table.
Templates
Several templates have been widely circulated and using one as a base should decrease legal fees. Financings are often easier and cheaper when a standard form is used and time is spent negotiating and drafting only the critical terms of a deal. The most important terms are economics (e.g. price, liquidation preference, valuation cap, or discount) and control (e.g. protective provisions or board structure).
Choose a lawyer that has familiarity with the templates below and can guide you to the best option for your raise.
Convertible Notes
Preferred Round
TechStars: “Light” Preferred
Y Combinator: Series AA
Joel Jacobson is an attorney with RUBICON Law Group, Ltd. He practices business law, including formation, funding, and transactions and enjoys solving problems for innovative companies. Joel has an interest in topics impacting the Colorado entrepreneurial community, skiing, and hiking. He can be reached on Twitter, LinkedIn, or Google Hangout.
Obligatory Disclaimer: This document is for informational purposes and is not legal advice. Your receipt of this document does not create an attorney-client relationship. You should not rely upon this information for any purpose without seeking legal advice from a licensed attorney in your state. We expressly disclaim all liability with respect to actions taken or not taken based on any or all the contents of this document.
