Congratulations! Your start-up is taking off, and you want to expand it by raising money. Regardless of the option of funding chosen, raising capital can be quite a tedious process that requires a considerably high level of preparedness. You may think you are ready in all aspects, but are you ready from a legal point of view?
Here are 7 important legal factors to consider as you start raising capital.
- What is your business structure? This is necessary as the type of business structure you adopt impacts your funding opportunities.
- Do you own your intellectual property? Have you registered your exclusive ownership of software codes, patents, product design, logo, and art and trademarked your brand names?
- What is the current share structure of the company? (Tip: you should have a capitalization table (aka Cap Table)
- Is issuing shares the best option? Do you realize that when you offer shares (equity) in your company, you are diluting your ownership and control of the company? Having this in mind, there are different legal arrangements that can be set up to issue shares and set limits for how much ownership you’re willing to offer in return for funds.
- Have you set aside an option pool? This consists of the company’s equity (shares) that has been reserved for early investors or employees of the company.
- How do you divide equity among start-up founders, advisors, and employees?
- Do you have a confidential or non-disclosure agreement executed? This document ensures that sensitive information regarding your business idea is not disclosed by the investors or potential investors to a third party.
The process of getting additional funding to keep your start-up in business is very tedious and exciting. However, the above-listed factors are very essential to consider before and during fundraising. Start-ups should also seek professional legal counsel as they are more thorough with due diligence.
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