{"id":182252,"date":"2023-07-26T06:15:00","date_gmt":"2023-07-26T05:15:00","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=182252"},"modified":"2025-07-02T00:38:11","modified_gmt":"2025-07-01T23:38:11","slug":"key-legal-documents-startup-investors","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/key-legal-documents-startup-investors\/","title":{"rendered":"What Key Legal Documents Do Startup Owners Need When Bringing on Investors?"},"content":{"rendered":"\n

If you are raising startup finance<\/a>, 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 \u2018conditions precedents\u2019 require certain other legal documents and formalities. This article will outline the essential legal documents you need when bringing on investors in the UK.\u00a0<\/p>\n\n\n\n

The Term Sheet <\/h2>\n\n\n\n

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. <\/p>\n\n\n\n

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Most parties intend for a term sheet to have no legal effect. However, if the parties do not draft the term sheet properly, it can create legally binding obligations<\/a>.<\/p>\n<\/div>\n\n\n\n

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<\/strong> tend to have legal effect in the context of a term sheet. <\/p>\n\n\n\n

Debt Financing<\/strong><\/td>Equity Financing<\/strong><\/td><\/tr>
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<\/strong>;
+ exclusivity agreement<\/strong>;
+ party who pays costs<\/strong>;
+ dates at which the negotiations end if no deal is reached<\/strong>; and
+ governing law and jurisdiction clauses<\/strong>.<\/td>		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<\/strong>;
+ exclusivity agreement<\/strong>;
+ party who pays costs<\/strong>;
+ dates at which the negotiations end if no deal is reached<\/strong>; and
+ governing law and jurisdiction clauses<\/strong>.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Investors’ Due Diligence <\/h2>\n\n\n\n

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:<\/p>\n\n\n\n