Investment rounds

Elena Mashina

To survive and develop, a startup needs investment. Moreover, if the startup is successful, each round is accompanied by a deal. These agreements should maintain a balance of interests of the parties - founders and investors. At the same time, the corporate structure is being built at these stages. Nevertheless, legally, relations are formalized at a very early stage through an agreement of intent, or an agreement on non-disclosure of confidential information may be required. You can read about how a lawyer can help a startup in various investment rounds in our article.

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Investment rounds

To grow into a confident business, a startup needs to go through several rounds of investments:

Preseeding round, when founders receive funding from their friends, family members and other close people;
Seeding round, when a startup receives funds to complete product and business model development;
Angel round, when a startup is trying to find its own business angel who will help not only with funding, but also with mentoring;
Round A - the first round when the startup starts early growth;
Round B - attracting investment at this round is usually required to expand the sales market or attract a new audience
Round C - the round from which the startup becomes profitable
Round D - this round involves the last receipt of funding before entering an IPO or takeover by another large company.

Legal support for various investment rounds

Depending on the round of investments, various legal instruments will be needed. They will formalize relations not only with investors, but also with employees, relations of founders among themselves.

Legal support of work with investors at various rounds

At the very beginning of work with investors, it is necessary to conclude an Agreement on the basic terms of the transaction - Term Sheet, Investment Memorandum, Commitment Letter, Memorandum of understanding.

This document contains key understandings regarding the legal and financial terms of the future transaction.

Before the investor invests in the project, he conducts the due diligence procedure. To implement this procedure, the investor will need confidential startup information. When providing it, it is best to conclude a non-disclosure agreement. It provides for the procedure for the transfer of confidential information and how it is used. Read more about this agreement in our other article "How to draw up a non-disclosure agreement (NDA)."

When a startup and an investor enter a deal, there is a need to structure it, and at these stages, more documents are required.

First, in order to receive an investment, you will need to conclude a share purchase agreement (SPA).

Secondly, a startup should already have its own constituent documents, the charter is the basic one.

Thirdly, a corporate agreement should be concluded if the founders want to provide for special conditions for the relationship. In a corporate agreement, you can provide for the obligation to vote in a certain way. The more complex the corporate structure is, the more this affects the corporate agreement. It may be needed, for example, if there is an option program, so that all participants in the company vote to increase the authorized capital. You can read more about the corporate contract in our other article "How to draw up a corporate contract."

Fourth, an Investors Rights Agreement may be concluded, which provides protection to investors, determines the procedure for participating in the management of the company, obtaining information, etc.

Conditions of documents with investors

Depending on the protection that the investor wants, the contract should include various types of conditions:

В зависимости от защиты, которую хочет получить инвестор, в договор следует включать различные виды условий:

Warranties – these conditions are specified in the contract and allow you to recover losses in case of their violation. As a rule, they are given in relation to the company when selling shares, for example, the condition of no debts.
Representations - these conditions are very close to guarantees, however, in case of violation, they allow not only to recover damages, but also to invalidate the contract.
Indemnity - the parties set losses in order to redistribute risks. Reimbursement of losses is not the responsibility of the partner, i.e. arises not only for violation of their obligations. In addition, the amount of losses can be determined in advance in the contract, instead of a full-fledged proof of the abstract amount of losses. For example, the contract contains a condition that if a startup is brought to any liability, the investor will be paid a certain amount of losses.
Veto power on certain issues (reserved matters)
Various anti-dilution mechanisms

Thus, the Protected Investor and the Protected Startup require careful legal consideration. Different documents may be required depending on the round of investment. At the same time, one should not forget about the interests of previous investors in subsequent rounds. In each case, the Corporate Agreement will have a different content, and different instruments will be chosen for investment: from the usual sale of shares to a convertible loan. If you have any questions or need help with legal support of a startup, please contact A4 Law Firm lawyers.

Investment rounds