Capital Raise Lawyers: Getting Startups Ready for Funding

Executing the necessary documents during the cap raise and having the due diligence material sorted will only help make the cap raise journey easier. In saying that, it can truly be tricky to get your head around it all, which is why you should get your capital raise lawyer to guide you through the process.
Corporate House Funding

Through hard work, determination, and a willingness to take a risk your vision has become a reality in the form of a startup and now you are ready for the next big step of your startup journey, a capital raise.

A cap raise is typically a pivotal moment for most startups as the influx of funds can lead to the development and expansion of your business. Despite the potential for a fruitful future coming out of a cap raise, it can also be a complicated process that requires you to ensure you have your “house in order”.

A cap raise will result in some form of due diligence being conducted on the company. There are also a number of key documents you are likely to encounter when undertaking a standard equity capital raising. A capital raise lawyer will know the ins and outs of these and should be able to guide you seamlessly throughout the process. In this article we take a high level look at the due diligence process and some of the key cap raising documents that a capital raise lawyer would help you out with:

  1. A Term Sheet;
  2. Securityholders’ Agreement; and
  3. Subscription Agreement.

Let’s have a look at each of these elements below.

Behind Every Successful Capital Raise is the Term Sheet

You have found your investor but before the celebrations can begin, you want to set out the general terms for the investment. The term sheet is likely to include the high level commercial terms and may often touch on the more ‘contentious’ issues of any raise, such as:

  • The valuation of the startup;
  • The investment amount; 
  • The key provisions to be included in the securityholder’s agreement and subscription agreement; and 
  • The rights of the investor. 

Negotiations on the term sheet can sometimes be tricky but a solid term sheet can help smooth the way for the rest of the capital raising process.

The Tough Part of a Capital Raise: Due Diligence

Once the term sheet is signed – often including strict confidentiality provisions – you will need to get moving on the due diligence process. This is a way for both parties to conduct detailed checks on each other to identify areas of risk and work out if they are suitable matches. 

In order to do this, both parties will conduct due diligence. The company will want to make sure the investor is who they claim to be and that they will be a good fit for the purpose. The investor will look at the company’s:

  • Corporate governance;
  • Structure; 
  • Operations;
  • Material agreements; and 
  • Investigate the company dealings to identify potential legal liability, financial insolvency, or any other red flags that may deem the investment too risky.

By keeping your corporate house in order you can make sure any creases have been ironed out and that the due diligence process is as smooth as possible.  

Key Due Diligence Materials Needed for a Capital Raise

While this list is only a starting point some of the key due diligence materials that may be requested by investors is as follows:

  • Corporate records and documents: minutes of directors’ and securityholders’ meetings, certificates of incorporation, company constitution, securityholders’ agreement;
  • Financial documents: financial statements, financial projections;
  • Intellectual property: details of registered and unregistered intellectual property rights;
  • Material agreements: company agreements with customers/clients, partners, and other third parties, including service agreements, confidentiality agreements, agreements for purchase, lease or sublease of property;
  • Employment documentation: employment agreements and terms of employment, details of employees, details of arrangements with contractors or consultants. 

Securityholders’ Agreement

The company securityholders’ agreement governs the relationship between securityholders of a company. Depending on the capital raising stage, the investor will either help the company create a new agreement, or be required to sign up to the existing agreement. 

The importance of this agreement comes from the fact that it clearly lays out the rights and obligations of the securityholders and will typically contain key features including:

  • voting rights; 
  • key decisions that require majority approval;
  • powers to appoint directors; 
  • restraints of trade;  and
  • dispute resolution mechanisms.

A well drafted securityholder’s agreement makes it easier to navigate the relationships between existing and new securityholders.

Subscription Agreement

In the case of a cap raise, the subscription agreement is a promise by the investor to provide the company with an agreed amount of capital in return for the issue by the company of a certain number of securities. For simplicity, think of this as the official agreement for the investor to receive securities for taking a chance on your startup and investing funds. 

One of the key features of the subscription agreement is the focus on the warranties that each party is required to give to the other party, and the respective obligations to ensure that the investor ‘invests’ and the company issues the securities.

Get a capital raise lawyer to help you

A cap raise can be an exciting time for any startup and the best way to give it the best chance of success is to be adequately prepared and organised.

Executing the necessary documents during the cap raise and having the due diligence material sorted will only help make the cap raise journey easier. In saying that, it can truly be tricky to get your head around it all, which is why you should get your capital raise lawyer to guide you through the process. 

Talk to us, your tech lawyers, and we can help you get your corporate house in order.

Book a Free
Legal Strategy Session

Share on Facebook
Share on LinkedIn
Anthony Bekker
Founder | Managing Director - APAC
Anthony Bekker founded Biztech Lawyers after leading both legal and operations at e-commerce marketing unicorn Rokt - helping grow it 10x from Sydney, to Singapore, the US and then Europe.

Anthony loves helping technology companies realise their global ambitions and solve their most complex problems; bringing a practical and highly commercial approach to legal matters. That approach is born of a breadth of experience helping hundreds of startups and scaleups, stints in strategy consulting and banking as well as an INSEAD MBA. Anthony began his career at Mallesons Stephen Jaques and became dual-qualified in the UK while undertaking in-house stints at BT the OFT.

Anthony is Biztech Lawyers’ Managing Director for APAC. As a tech-centric law firm we use an array of legal technology to make legal processes more efficient, allowing clients to grow as painlessly as possible. Our global offerings are also an opportunity to propel the world’s most innovative companies to reach international markets. We’re your growth partners.
While Biztech Lawyers has used reasonable care and skill in compiling the content of this article. we make no warranty as to its accuracy or completeness. This article is only intended to provide a general guide to the subject matter and not intended to be specific to the reader’s circumstances. This article is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice and does not create a client-solicitor relationship between any user or reader and Biztech Lawyers. We accept no responsibility for any loss which may arise from reliance on the information contained in the article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information provided.