Table of Contents
If you are raising startup finance, you may wonder what legal documents you need. Generally, you will need a term sheet and a financing agreement to execute the financing. You will also likely need to supply additional legal documents as part of the due diligence process. Finally, post-agreement formalities called ‘conditions precedents’ require certain other legal documents and formalities. This article will outline the essential legal documents you need when bringing on investors in the UK.
The Term Sheet
A term sheet, also called heads of term, is negotiated relatively early in the financing process and sets out the key terms governing the financing arrangements. The purpose of a term sheet is to focus the parties’ minds so they can negotiate the finer points, all of which will comprise the final transaction agreement.
The exact terms that the terms sheets set out depend on whether you are raising equity (shares) or debt financing (such as loans and bonds). As you will see in the table below, some standard terms overlap for both debt and equity. Notably, the terms in bold tend to have legal effect in the context of a term sheet.
| Debt Financing | Equity Financing |
| Common terms include the: + loan amount; + interest payable; + terms of any conversion rights to swap debt for shares; + repayment schedule, including the redemption date; + specially negotiated loan covenants; events of default; + confidentiality clause; + exclusivity agreement; + party who pays costs; + dates at which the negotiations end if no deal is reached; and + governing law and jurisdiction clauses. | Common terms include the: + valuation amount; + investment amount and the number of shares issued in exchange; + special rights, if any, attached to the newly issued shares; + conditions parties must fill before signing the share purchase agreement; + confidentiality clause; + exclusivity agreement; + party who pays costs; + dates at which the negotiations end if no deal is reached; and + governing law and jurisdiction clauses. |
Investors’ Due Diligence
Due diligence is the investigation an investor undertakes to ensure the target business is financially and legally sound. In other words, due diligence allows an investor to:
- evaluate the startup’s financial health;
- identify any potential risks or liabilities; and
- verify the accuracy the startup provides.
Investors will also seek information on your startup’s financial performance and forecast. While this information is not strictly contained in legal documents, the target usually has a legal obligation to supply factually accurate information. If you do not, investors may have a legal claim against you for misrepresentation and breach of warranty.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
The Financing Agreement
The financing agreement is the legally binding agreement that gives the financing legal force. An equity financing agreement may be called a share purchase agreement, subscription agreement, or simple agreement for future equity (SAFE). Debt financing agreements are generically called debt documents.
In all cases, these are the documents that, once signed, create legal obligations on the party to complete the financing. Debt financing agreements will be contained in the loan documentation and other documents like security agreements and trust deeds.
Transaction Formalities With Investors
After you execute the financing agreement, certain items must happen before the transaction completes. These include:
- obtaining shareholder resolutions approving the financing;
- obtaining regulatory approval, which is typical for regulated industries; and
- undergoing final solvency checks against your startup.
Because completion is conditional on these processes happening, financing agreements usually call these ‘conditions precedent’. These often require one or both parties to undertake certain legal formalities and produce various legal documents. For instance, convening a shareholder meeting requires:
- several board resolutions;
- board minutes;
- legal notice supplied to shareholders containing the resolution;
- minutes of the shareholder; and
- post-meeting particulars forwarded to the other party and Companies House.
In the context of debt financing, any security in the target’s assets will have legal effect only if it is registered at Companies House. This happens after the transaction has been completed.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Key Takeaways
When raising startup finance in the UK, critical legal documents investors need include:
- a term sheet outlining the financing terms (though not usually legally binding);
- the financing agreement (such as share purchase agreements for equity financing or debt documents for debt financing), which create legal obligations; and
- various legal documents required as part of the due diligence process, including articles of association, shareholder agreements, IP agreements, and contracts.
Post-agreement formalities, called conditions precedents, involve obtaining shareholder resolutions, regulatory approvals, and undergoing solvency checks. These formalities require the production of additional legal documents such as board resolutions, minutes and legal notices.
If you need help with your startup’s key legal documents when bringing on investors, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The critical legal documents include a term sheet outlining financing terms, financing agreements (such as share purchase agreements or debt documents), and various legal documents for due diligence, such as articles of association, shareholder agreements, and contracts.
Post-agreement formalities, known as conditions precedents, include obtaining shareholder resolutions, regulatory approvals, and undergoing solvency checks. These processes require the production of additional legal documents, such as board resolutions, minutes, legal notices, and particulars, and may involve registering security at Companies House for debt financing.
We appreciate your feedback – your submission has been successfully received.
