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You may be the founder of the idea, an investor or director or otherwise involved in the developing business. If you are part of a venture that is, or is about to be, riding the fundraising wave, Tisher Liner FC Law can guide you on the journey.
The first phase of your funding journey
It is common for start-ups to be initially funded by family, friends and/or the founder themselves. This may occur through financial support, provision of service for no fees, assignment of intellectual property etc. As a result, there may be anything from 1-2 shareholders to 10-15 shareholders at this early state. Many, if not all, of these may have provided ad hoc support without any documentation or clear objective.
This first phase maybe where the “idea” has been investigated and/or tested to determine if it has merit or is capable of working.
Phase two: prototyping and documentation
The next phase is typically where the business seeks funding to develop a prototype, market test, key hires or complete some other milestone etc. It is at this stage that third party investors are often approached for funds.
Before this occurs is an excellent opportunity to document current shareholder relationships, develop business plans, think about the further funding requirements of the business (if this stage is a success) and your long term objectives and exit strategy (if appropriate).
Phase three: seed raising
The next step is often referring to as the seed raising phase. Depending upon the milestones you want to achieve, the steps following prototyping and documentation can look different. There may be anything from a single further Series A fundraising, through to as many fundraising rounds as is viable for the needs of the business. Take care to consider what will be tolerated by the investment market and adjust your rounds accordingly. Keep in mind that at each round, the existing shareholders are typically diluted.
Dilution is a natural consequence of fundraising. We strongly encourage clients to ensure that at a minimum, the shareholder relationship and founder rights (if applicable) are documented and agreed before or in conjunction with the Seed Raising round. Documenting the relationship should be done in such a way as to keep open as many opportunities for the business as possible. Shareholders and founders rights agreements are drafted with mind to ensuring the client retain control of their business intent. Mechanisms to minimise dilution risk can also be considered and documented if appropriate.
TLFC Law acts for businesses, founders, directors and investors in this area. The approach we adopt, depends upon our client in the transaction, whilst at the same time remaining conscious that the success of the business as a whole, is usually linked to a successful outcome for our client. It may be necessary for a party to consider compromising its interests, to protect the viability of the business proposition into the future.
For more information please contact Felicity Simpson or a member of our Start-ups and Emerging Enterprises Team.