Key points
- A fundraising round is a complex legal transaction: solid preparation speeds up the process, strengthens your negotiating position and facilitates closing.
- Before due diligence, the intellectual property must belong to the company; rights not transferred by the founders are a frequent sticking point.
- The shareholders' agreement, key contracts and employment contracts must be put in order beforehand, in particular as regards change of control clauses.
- The term sheet sets the valuation, amount, type of securities and clauses of the future shareholders' agreement; understanding ratchets and liquidation preferences before signing is decisive.
- The final documentation includes the issue of the securities, the shareholders' agreement, the amendment of the articles of association and, where applicable, representations and warranties that may engage the personal liability of the founders who sign them.
- Closing, when the funds are paid in, may be subject to conditions precedent that are precisely defined and subject to set deadlines.
A fundraising round is not just a financial transaction. It is a complex legal transaction that commits the company and its founders to documents whose effects are felt for several years. Insufficient preparation leads to delays, difficult negotiations or even the abandonment of the deal. Solid preparation speeds up the process, lets you approach the negotiation on better terms and prepares for closing.
Putting the legal fundamentals in order
Before entering into discussions with investors, the company must be in order on the points that will be covered by due diligence. Investors or their lawyers will systematically check several points.
Intellectual property. The company's technology assets must belong to the company, not to its founders personally. This means that the rights to the code, databases and other works must actually have been assigned by the founders and service providers. Intellectual property that has not been transferred is a sticking point in many due diligence reviews.
The shareholders' agreement. If the company has no shareholders' agreement, or if the existing one is incompatible with the entry of an investor, a new one will have to be negotiated before or during the fundraising process. You may as well work on it beforehand.
Key contracts. Contracts with major customers, strategic suppliers and partners must be valid, signed and free of excessively unfavourable change of control clauses. A clause allowing a customer to terminate without compensation if control of the company changes may weaken your position.
Employment contracts and ownership of works. The contracts of key staff must include confidentiality clauses and properly address the ownership of works created in the course of their duties.
What does a term sheet cover?
The term sheet is the preliminary document proposed by the investor. It sets out the main terms of the investment: valuation, amount invested, type of securities (ordinary shares, preference shares), rights attached to those securities, closing conditions and the main clauses of the future shareholders' agreement.
See also: term sheet lawyer.
Although it is generally not legally binding in its main terms, it morally commits the parties and sets the parameters of the final negotiation. It is important to understand each mechanism before signing it: ratchets, liquidation preference rights, veto rights and anti-dilution clauses have concrete effects on the founders' dilution and on how proceeds are shared in the event of a sale.
The final documentation
The final documentation for a fundraising round generally includes: the terms of issue of the new securities, the shareholders' agreement (or the amendment to the existing agreement), any amendment of the articles of association, the warranty and indemnity (garantie d'actif-passif) or the founders' representations and warranties if requested, and, in some cases, undertakings to hold the securities (lock-up).
Each of these documents must be read and understood before it is signed. The representations and warranties given by the founders engage their personal liability if they prove to be inaccurate.
Closing and conditions precedent
Closing is the moment when the funds are actually paid in and the securities issued. It may be subject to the fulfilment of conditions precedent: obtaining a regulatory authorisation, lifting a legal condition identified during due diligence, signing a key contract. These conditions must be precisely defined and their deadlines set.
See our dedicated fundraising lawyer page and our start-up lawyer page to find out more about how we assist you.
To be assisted: lawyer for your fundraising round.
