Startups depend upon funding, so preparing the right documents can help you obtain the funding you need.
No matter what stage or type of funding is at hand, the biggest thing that all investors will be concerned with is the quality of the investment. This means assessing any and all risks, whether they are legal, financial, or market-based. A company can make this process smoother by preparing, collecting and organizing the appropriate information. To attract an investor,the company should also properly prepare a few key documents that can assure the investor that the investment is a sound one, and that the company is well-run.
The Minute Book is the official record of the company’s activities. It should include all directors’ and shareholders’ resolutions, corporate bylaws, articles of incorporation and any amendments to the articles, corporate registers including a register of directors and shareholders, share register, subscription agreements, the form of share certificates, the shareholders’ agreement (if there is one) and copies of all major contracts. Investors will want to inspect the Minute Book to ensure that all corporate actions have been properly authorized. It is important to keep the Minute Book up to date and organized.
A startup should provide a term sheet, otherwise known as a letter of intent. This is a non-binding document meant to lay out the big-picture terms and conditions of the potential investment. This means outlining the structure of the investment, including a timeline for funding as well as the transfer of shares and equity (or other securities) to the investor. Specifications about board structure and responsibilities of the investor can also be included, as well as any substantial points to be included in a future shareholders’ agreement.
**Share Subscription Agreement **
If the deal has progressed and the investor is ready to invest in the company, a share subscription agreement will be required. This is the agreement that contains the terms of the deal between the company and the investor—how many shares, at what price, at what time, for what form of payment. Depending on the investor, the company may be required to provide representations and warranties that the startup has no existing undisclosed loans, liabilities, material agreements, or ongoing litigation, and that the agreement will not cause the company to breach any of its other agreements. The subscription agreement also typically contains a statement of the type of exemption being relied upon to exempt the transaction from prospectus requirements under the applicable securities laws.
**Shareholders’ Agreement **
Now that the investor is a shareholder and interested in how the company is being managed, they may wish to have a shareholders’ agreement in place. The shareholders’ agreement is a flexible instrument that can (among other things) protect the shareholder’s representation on the board, limit the board’s ability to make certain decisions without shareholder approval, or protect the shareholders by giving them preemptive rights when more shares are issued in the future. Many minority investors will want to ensure that the shareholders’ agreement protects their rights and investment.
To see standard versions of the various documents and agreements discussed in this article, visit our Small Business Law Library!
This blog was co-written by Alina Butt.