How Do I Seek Investors for My Startup?

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. 

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. 

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.

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