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How Do I Seek Investors for My Startup?

Table of Contents

In Short

    • Ensure your business is legally prepared for due diligence by protecting intellectual property and having clear, enforceable contracts.

    • Draft a shareholders’ agreement covering voting rights, profit distribution, and exit clauses.

    • Stay compliant with FCA regulations and negotiate favourable investment terms to safeguard your control and business interests.

Tips for Businesses

Before seeking investors, ensure your startup is legally ready by securing intellectual property, drafting clear contracts, and preparing a comprehensive shareholders’ agreement. Regulatory compliance is critical, especially when fundraising through equity crowdfunding. Professional legal advice can help you navigate these challenges and protect your long-term interests.

Securing investment is a crucial step in growing a startup. While you might be focused on perfecting your pitch to attract the right investors, it is also essential to understand the legal landscape that surrounds startup investment. Your relationship with your investors will not be just about their financial backing. It will also involve legal agreements and structures. Whether you are looking for venture capital, angel investors, or fundraising through crowdfunding, you must understand the legal implications of seeking investment. This article will explain how to seek investors for your startup and prepare for fundraising by highlighting essential legal considerations. 

Preparing for Investor Due Diligence 

Before approaching potential investors, ensuring that your business is legally sound and investor-ready is essential. Due diligence is a process investors use to evaluate the risk and potential of investing in your startup. This process includes:

  • reviewing legal documents;
  • financial records; 
  • intellectual property; and
  • other critical aspects of your business. 

Before seeking investors, you should ensure your company owns its intellectual property. You can register your trade marks and patents through the Intellectual Property Office (IPO). Protecting your intellectual property secures your brand’s image and assets and boosts investor confidence in your startup.

Potential investors also expect your contracts with clients, employees, and suppliers to be clear and enforceable. You should check that these are in order and are legally sound. A lawyer can advise you on these aspects and help ensure your startup has a solid legal foundation. 

Drafting a Shareholders’ Agreement

The shareholders’ agreement is one of the most critical legal documents you will need when taking on investors. This document outlines shareholders’ rights and obligations and governs the relationship between founders, investors, and other stakeholders. 

The following table highlights vital legal considerations surrounding shareholder agreements. 

Legal Consideration Explanation 
Voting rights You should ensure that the agreement outlines shareholders’ voting rights. Investors often request specific voting privileges, so clarifying these in writing is crucial. 
DividendsDetermine how profits will be distributed to shareholders and detail this in the shareholders’ agreement. 
Exit clauses Your agreement should include clauses that outline exit strategies for investors.
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Protecting Ownership 

One of the most significant concerns for startup founders when seeking investment is the dilution of ownership. Offering equity to investors means giving up a portion of your company, so it is crucial to protect your long-term interests while ensuring your investors feel adequately compensated for their financial commitments. 

When issuing shares, you must consider how much equity you will be giving away and the impact of this on your financial and voting interests. It can be good to seek professional advice on structuring share issuance, especially if you plan to take your startup through multiple funding rounds. 

Regulatory Compliance 

You must meet regulatory requirements when seeking investors and fundraising for your startup. These can vary depending on the type of investment you seek. The Financial Conduct Authority (FCA) regulates equity crowdfunding platforms, angel investment, and venture capital firms in the UK. It is a good idea to seek advice to ensure your startup complies with the FCA’s regulations. 

For example, suppose you are raising capital through equity crowdfunding. In that case, you must ensure that your fundraising activities comply with the FCA’s regulations, which include providing risk warnings and maintaining transparency with investors. 

Investment Terms

Negotiating investment terms is essential for securing funding and protecting your interests when raising capital. Angel investors and venture capitalists will often propose terms that benefit them. It is critical to approach these negotiations with a strategy that protects your long-term vision and control of your business. Once you establish suitable terms, ensure they are explicitly documented in the investment agreement. 

Key Takeaways 

Seeking investors for your startup is a significant step toward scaling your business, but this stage comes with various legal complexities that require your attention. These include the following:

  • preparing your business for investors to conduct due diligence; 
  • drafting a comprehensive shareholder agreement that covers aspects such as voting rights, profit sharing, and exit strategies; 
  • having an awareness of the implications of equity dilution across funding rounds and issuing shares with this in mind; 
  • seeking professional financial and legal advice;
  • complying with the FCA’s regulations; and 
  • negotiating suitable investment terms. 

By understanding these legal considerations, you can navigate the fundraising process more effectively, secure the correct type of funding, and protect your business’s long-term interests. 

If you require legal advice about raising capital 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.

Frequently Asked Questions 

Why do investors conduct due diligence?

Due diligence is a process investors use to evaluate the risk and potential of investing in your startup. They will carefully review your business’s structure, contracts, and financial background. 

What is a shareholders’ agreement?

A shareholders’ agreement is a legal document that outlines shareholders’ rights and obligations and governs the relationship between founders, investors and other stakeholders. 

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Jessica Drew

Jessica Drew

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