8 Tips for a Smooth Early Stage Startup Legal Process

by | Jun 10, 2015 | Financial Services

Raising capital can be exhilirating, until you realize that the legal paperwork can take up a lot of time and emotional toll. These 8 tips are designed to help you make the most of this important, often daunting, process.

1. Get Good Counsel
Ask around for recommendations from other entrepreneurs. Before you hire your lawyer, ask about his/her experience with the investment process and with companies in your industry or sector. Pay attention to whether this individual’s personality is a good fit with yours. You will be spending a lot of time interacting with this person, and you’re hiring this individual to protect your interests. Oh, and don’t scrimp. You’ll likely regret it later.

2. Start With Standard Documentation and Modify
You don’t have to start from scratch. There are many good template documents out there, and of course your lawyer likely has his or her own standard documents from which to start. This will save you time and money, and also helps provide the basic outline of the issues you can be prepared to address. Remember, it might be faster and cheaper to have your attorney start with drafts he or she is already familiar with rather than have them review and revise a draft they are not familiar with.

3. Get Organized
You’ll need to have your employment agreements, NDAs, intellectual property agreements, material contracts etc., ready for review by your investor. Get them together ahead of time so you’ll be ready to share them at the right time. When there’s a potential deal to be done, you don’t want to risk losing the deal just because you didn’t have the diligence items ready.

4. Agree on Major Elements
In general, there are two parts to most of the legal agreements you’ll be working with: commercial clauses, such as percentages, valuations, and other items that make up business points, and legal clauses, such as filing procedures and jurisdictional authority. As much as you can, work out the major commercial points with your investor before you bring in the lawyers. This helps streamline the process and is a good collaborative basis from which to begin the legal deliberations with your investor. If you don’t have enough experience to negotiate business terms, it’s ok to reach out to your lawyers or other advisors.

5. Understand Your Legal Responsibilities to Existing Shareholders
If you already have shareholders, be sure you’re clear on what your legal responsibilities are with respect to decision-making. Understand when you need to obtain their consent, when you might want to get their consent whether or not it’s needed, and when you don’t need to bother them.

6. Track Changes
Be diligent and keep track of the changes going back and forth in the documents. If possible use the ‘track changes’ function in Word, and then save each version with a unique file name. You’ll be surprised how often you’ll want to go back to see changes made a few iterations ago, and who suggested what.

7. Lawyer to Lawyer
Talk early and often to your investor, but never to his lawyer, unless all four of you are present.

8. Protect Your Integrity
Do what you say you will do. Keep your promises. Don’t claim to know something if you don’t. Ask clarifying questions before you jump in with an opinion. Building and maintaining a reliable reputation will serve you well as you progress through the startup journey, and beyond.

At VerifyInvestor.com we understand the entrepreneurial, investing and legal worlds, and we know what’s important when they all intersect. Visit our site to learn more about verified accredited investors.

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