Consult with your legal counsel regarding the form and use of any of the documents listed below. The content provided below is for informational purposes only. None of the information conveyed below should be interpreted as legal advice.
Introduction
Each startup will a different path through its business lifecycle. Once the startup decides to take on external capital, certain documents will be required to facilitate the funding process. A few of these key documents are outline below.
- Articles of Incorporation
- Investment Teaser Deck
- Non-Disclosure Agreement (NDA)
- Offering Memorandum
- Term Sheet
- Investors’ Rights Agreement (IRA)
- Stock Purchase Agreement (SPA)
The NVCA has made available a library of document templates for entrepreneur which can be accessed directly on their site by following this link: NVCA Model Legal Docs
1. Articles of Incorporation
Consult with your legal counsel regarding the form and use of the Articles of Incorporation.
The articles of incorporation is a set of documents which establishes the legal creation and purpose of an entity. The articles feature key information about the company including name, address, the type of entity, board of directors, type and number of shares authorized. The articles are filed in the state where the company chooses to incorporate.
This document is important as it governs the numbers of shares authorized for the entity and the associated rights & preferences associated with each share class. Each time the company raises additional capital which would change the capital structure, the articles may need to be amended and restated to reflect the latest changes.
Helpful Links:
- https://propel.smeal.psu.edu/repository/legal/
- https://medium.com/@tylertate/startup-cheat-sheet-how-to-incorporate-your-company-c85384e8f7a0
- https://www.svb.com/blogs/chris-behrens/types-of-corporation-startup
2. Investment Teaser Deck
When the startup founders first decide they need to raise outside capital, the initial inclination may be to immediately start investor outreach to gauge interest. While this is a logical first step, taking this step without being prepared could result in wasted time and effort.
Tthe startup needs to be prepared for inevitable questions from potential investors and be prepared to provide enough info to prospects to pique their interest without telling the whole story or oversharing proprietary information without a non-disclosure agreement (NDA) in place. Most investors will not want to be bothered executing an NDA unless they know the opportunity is worth their time.
The startup should be prepared for this first investor interaction with a clear and concise investment teaser deck. The teaser deck should clearly and concisely summarize the company, its market potential, and the investment opportunity. While this document is often referred to as a “deck”, many investors will expect this document to be a one-pager.
The teaser deck should include key company details, a brief elevator pitch, executive summary of the opportunity, and a summary of key aspects of the business such as market, products, customers, founder team, financial prospects, and the investment opportunity.
Helpful Links:
- https://medium.com/pear-resources/whats-a-teaser-deck-and-how-to-make-one-that-works-f9c6562d7925
- https://bothsidesofthetable.com/what-should-you-send-a-vc-before-your-meeting-2406bc873616
- https://corporatefinanceinstitute.com/resources/knowledge/deals/what-is-an-investment-teaser/
3. Non-Disclosure Agreement (NDA)
Consult with your legal counsel regarding to form and use of NDAs.
The non-disclosure agreement, of NDA, is a document commonly used in business interactions and transactions. The purpose of the document is for the party receiving confidential information to agree that they will not use this information for their own benefit. This document is also referred to as a confidentiality agreement.
In the context of startup funding, this document is sent by the startup to the potential investor once the investor voices interest in the opportunity (usually after reviewing the teaser deck). Because the startup will need to divulge confidential information about the business to potential investors, the startup will want to be sure they have an NDA in place to mitigate the risks of sharing their proprietary information.
While an NDA does not necessarily prevent the recipient, or receiving party, from using disclosed information for their own benefit, the NDA does establish the legal implications should a breach of confidentiality occur. Not every potential investor will want to sign an NDA, especially more established investors and funds. In some cases, startups may be expected to proceed with discussions based on verbal agreements of confidentiality and/or the investor may provide the startup with their own NDA form to sign. Consult your legal counsel related to decisions regarding the NDA process.
According to the Corporate Finance Institute, a common high-level structure for an NDA would include:
- Parties definitions
- Confidentiality definitions
- Exceptions to Confidentiality
- Objective for Disclosure of Information
- Destruction of Materials
- Enforcement Period and Termination
- Restraint Provisions (i.e., non-solicit or non-compete)
- Governing Jurisdiction
- Binding Agreement
- Legal Implications for Breach
Helpful Links:
- https://www.docsend.com/blog/the-startup-guide-to-ndas-why-and-when-you-need-one/
- https://www.everynda.com/blog/startups-use-nda/
4. Offering Memorandum
Consult with your legal counsel regarding to form and use of the Offering Memorandum.
The Offering Memorandum, also referred to as a Private Placement Memorandum or Investment Memo, is the document a startup will provide to prospective investors with detailed information related to a specific funding round.
Broadly, this document provides potential investors with information on the offering and provides the startup protection from liability associated with issuing securities in the company. intended to convey whatever information is needed for investors to make the decision whether to invest.
The Offering Memorandum typically includes the following components:
- Company overview
- Investment opportunity overview
- Company business plan
- company products / services
- Competitive analysis
- Marketing and sales strategy
- Intellectual property
- Operational summary
- Organization structure
- Company history (milestones)
- Financial performance and projections
- Exit strategy
- Current funding round offering details
An appendix will also also typically include more detail on any of the topics above that did not make it to the body of the document, as well as terms of the memorandum, risk factors summary and an accredited investor questionnaire (if not separately provided).
Helpful Links:
- https://corporatefinanceinstitute.com/resources/knowledge/deals/offering-memorandum/
- https://thestartupgarage.com/tsgwiki/sample_private_placement_memorandum_ppm/
- https://nextviewventures.com/blog/the-investment-memo/
- https://visible.vc/blog/investment-memo/
5. Term Sheet
Consult with your legal counsel regarding to form and use of the Term Sheet.
The Term Sheet is a non-binding agreement that defines the terms of a potential funding round. For startups, this document will be circulated to those potential investors who have shown interest in proceeding with the funding round after reviewing the documents above and having discussions with the founder team.
While subsequent diligence and contracting will take place before a funding round is ultimately closed, this document, once signed by interested investors, sets the formalized process in motion by clearly defining key terms including:
- Investment amount
- use of proceeds
- post-money valuation
- security class offered
- liquidation preferences
- dividend terms
- redemption terms
- conversion terms
- voting rights
- board seats
- founders / employee vesting schedules
- estimated timing to close
- warranties
- conditions to close
Helpful Links:
- https://www.svb.com/blogs/kamir-kothari/read-startup-term-sheet
- https://visible.vc/blog/term-sheet-template/
- https://blog.salesflare.com/term-sheet-guide
- http://westchesterangels.com/how-to-prepare-a-term-sheet-a-step-by-step-guide/
6. Investors’ Rights Agreement
Consult with your legal counsel regarding to form and use of the Investors’ Rights Agreement.
The Investors’ Rights Agreement (IRA), also referred to as the shareholders’ agreement, defines the rights and privileges afforded to shareholders in the startup. This legal document acts to protect both the interests of the company and of the shareholders. Common rights & privileges stipulated within this document include:
- Liquidation preference
- Participation
- Dividends
- Voting rights
- Information rights
- Board membership
- Observer rights
- Inspection rights
- Indemnifications
This document is updated upon each new funding round closed by the startup in order to capture the rights & preferences associated with all shares in the capitalization table post-close.
Helpful Links:
- https://www.upcounsel.com/investor-rights-agreement
- https://www.thebalancesmb.com/what-is-a-shareholders-agreement-4796559
- https://www.contractstandards.com/public/contracts/investor-rights-agreement
7. Stock Purchase Agreement
Consult with your legal counsel regarding to form and use of the Stock Purchase Agreement.
The Stock Purchase Agreement (SPA), also referred to as the investment agreement, is the legal document which defines the terms of a sale of a company’s stock. Once executed, this document represents the legal contract between the investor and company. Typical components of the SPA include:
- Company name
- Investor name
- Share class
- Par or issuance value of shares
- Number of shares
- Covenants
- Closing conditions
- Representations / warranties
- Indemnification
- Termination
- General Provisions
Helpful Links: