Pre-Seed Startup: Legal Insights and Requirements

Launching a startup begins with the crucial pre-seed stage. During this stage, you will lay the groundwork for your business concept to come to life, transforming it into a viable product or service. As this is the earliest stage in the startup process, it involves smaller investments with less formal structures. However, it is crucial to understand the legal considerations relevant to the pre-seed stage to ensure your new business starts on a robust and legally sound foundation. This article will explore the legal aspect related to the pre-seed stage and highlight essential legal insights so you can get your early-stage startup off the ground successfully. 

1. Investment Options 

Pre-seed funding is the initial capital founders raise to develop their business idea. The funding you will raise during this stage is typically significantly smaller than in later rounds. You might use this funding to create a prototype, conduct market research and establish your minimum viable product (MVP). 

To generate this funding, you might bootstrap. Bootstrapping refers to a founder funding their business with their personal financial resources and revenue from initial sales without relying on initial investors. Alternatively, you might seek funding from friends and family. Or, you might seek funding from private investors. For example, some angel investors and early-stage venture capitalists will invest in pre-seed startups. They can provide early-stage funding, mentorship and strategic advice, helping to accelerate your startup’s growth. This funding can be scarce and competitive, so you should have a clear business plan and pitch deck ready.

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Having explicit and well-documented investment agreements for any funds you receive is crucial, even if you have a personal connection with the investor. These agreements should clearly outline the terms, conditions and expectations relevant to the investment. They will help prevent misunderstandings and protect you and your investors. A lawyer can review and draft investment agreements to ensure they are legally sound. 

2. Choosing the Right Business Structure 

As a founder, one of the first legal decisions you must make is selecting the most suitable business structure. Common options involve:

• sole tradership; 
• business partnerships;
• limited companies; and
• limited liability partnerships (LLPs).

Each structure has different implications regarding liability, taxation, and governance. For example, a sole trader would have unlimited personal liability for their business. Alternatively, shareholders have limited liability in a limited company, meaning they protect personal assets to the extent of their investment. It is a good idea to consult a lawyer at this stage. They can help you to choose a structure that best aligns with your circumstances and business goals. 

3. Formalising the Founders’ Agreement

It is common for multiple individuals to found a startup at the pre-seed stage. A founders’ agreement is a legal contract between the founders that outlines their roles, responsibilities, and ownership. 

Drafting a robust founders’ agreement can prevent conflicts and ensure everyone is on the same page. This agreement should cover aspects such as: 

• each founder’s role and their responsibilities;
• equity splits;
• a framework for resolving disputes;
• exit procedures; and
• decision-making processes. 

4. Protecting Intellectual Property 

As your business concept is in its very early stages, you will likely begin to develop branding and consider developing particular innovations. These form part of your startup’s intellectual property. 

Intellectual property includes aspects such as:

• trade marks;
• patents; 
• copyright; and 
• trade secrets. 

A lawyer can identify and protect your intellectual property. This process will likely involve registering your trade marks and patents with the Intellectual Property Office (IPO) and protecting trade secrets within comprehensive contracts. 

5. Financial and Accounting Systems 

Accurate financial records and accounting practices are essential for managing your startup’s finances and preparing for future funding rounds.

Key Takeaways 

The pre-seed stage is the earliest time in a startup’s lifecycle. At this stage, you will focus on developing your business concept, conducting market research and building an MVP. You might begin to seek initial funding to develop your ideas. 

It is critical to address key legal considerations early to set a solid foundation for future growth. These legal considerations include the following:

• considering your investment options; 
• seeking legal advice;
• drafting an investment agreement to formalise the investment; 
• choosing a business structure; 
• developing a founders’ agreement; 
• protecting your startup’s intellectual property; and
• setting up financial and accounting systems.

By being proactive and considering these legal aspects, you can protect your business interests, avoid potential disputes and begin to attract investors. 

If you would like legal advice about seeking funding for your startup, 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.