The Legal Steps You Must Take Before Making Your First Investment

By Fernando Berrocal

This blog article will be greatly useful for you and your startup team if you are planning to raise money for the first time for your startup's launch and early stages of growth. Be aware that investors will examine many business factors of your startup before approaching venture capital (VC) organzations for business pitch opportunities.

Legal Work

Despite the possible immaturity of your startup, they usually demand a certain level of business structure and order from your organization and want to see a plan that will help to improve things even further. The most crucial legal matters you should take care of before speaking with your possible startup investors are summarized in the paragraphs that follow.

Startup Formation: Firstly, your startup must have certain components when it is first formed. The following two elements are the most crucial in these types of forms.

  • Become a Delaware C Corporation via Business Incorporation: Business investors will anticipate that your business will be a Delaware "C" corporation. Investors will probably want you to convert from your present organization before moving forward with seeking capital if your firm is not already a Delaware C corporation.

  • Business Registration With the State: To conduct business in any appropriate state, your organization must be qualified accordingly, but take caution since state regulations will eventually fluctuate. You must register as a foreign corporation with the "California Secretary of State" if you are a Delaware C corporation conducting business there, for instance.

Venture Capital

Intellectual Property (IP): Then there is "Intellectual Property", which includes things like inventions, literary and creative works, designs, as well as symbols, names, and other things utilized in trade. The following three considerations need to be considered in this section.

  • Intellectual Property (IP) and Assignment of Inventions:  This is an important component that is much too frequently ignored. Establish a chain of title for all your organization's IPs, and make sure that everybody who touches your code or other IP is required to sign an invention assignment agreement. Since they don't want a former employee to emerge from hiding and claim ownership after your business succeeds, investors are particularly worried about this specific issue. You want clear agreements in place that transfer a consultant's or employee's work product to the business. And also to prevent them from claiming ownership of the work completed while they were working for your business.

  • Concerns for Branding and Business Trademarks:  Before you apply for business financing, you should start to examine branding and trademark issues. That will only build your trust with investors and raise your chances of getting funded. Even if the majority of startups don't currently have strong brands, consider registering a trademark to avoid future disputes. Simply registering a domain name is insufficient. Before you start spending money on your brand, you should do a thorough trademark search to look for rival businesses using the same mark as well as businesses that produce comparable goods and use similar marks.

What You Need To Do Legally Before Your First Investment

Equity Organization: For these corporate organizations, the equity structure is crucial. In the section that follows, we'll discuss how to set up this equity structure.

Establish a Mechanism for Equity: The highlights of this extremely broad area are the following ones:

  • Equity Contracts: Equity agreements with vesting provisions should be signed by the founders and any additional investors. Generally, vesting is spread out over a period of four years; however, different arrangements are also very frequent.

  • Plan for Equity Incentives: To offer options or restricted stock to workers and consultants, you should set up an equity incentive plan, often known as a stock option plan.

  • Submit Your Elections Under Section 83(b): Any acquisition of stock that is susceptible to vesting should be followed right away by the filing of an 83(b) election, which must be done within 30 days of the stock purchase. You cannot make up for missing this deadline later. Future tax consequences for you might be severe if you fail to submit your 83(b) election on time.

Employment: We will concentrate on employment agreements in this section. We shall go into further detail in the sentence that follows.

  • Employment Contracts and Letters of Interest: Make sure you have all the necessary employment documentation and procedures in place, including employment agreements. Other important things to include are offering business letters, confidentiality agreements, and invention assignment agreements if you have employed anyone. Additionally, be certain you register with the relevant state employment departments. Pay close attention to contractors, interns, and pay.

Online Agreements: This is a brand-new number that is currently increasing daily. We shall discuss the following point in this section.

Privacy Policy and Terms of Use: If you run a website or any equivalent sales/distribution/service, you should have a privacy policy and terms of use in place. These legal agreements will essentially define your relationship with your customers, so they must be specific and well-designed.

Most importantly, keep good records of everything. It will make the financing process go more smoothly and will save you significant frustration. This includes keeping copies of your business charter and bylaws, minutes of board meetings, any board and/or stockholder consents, major customer lists, budgets, business plans, employment agreements and offer letters, and any other documents that have been important in your course of business. You should make sure all the applicable documents are appropriately signed and organized somewhere you have easy access to them.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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