Once your startup is ready to seek infusion from professional investors, your fundraising checklist should include obtaining the right legal documents. Understanding the purpose of each of these documents and reasons why they are essential will help you to set up for success when it comes time to secure funding.
So, here is the list of essential key documents you will need for early-stage investment
Certificate of Incorporation
A Certificate of Incorporation or COI is a legal document pertaining to the formation of a startup or private corporation under state law. To receive this certificate, you must need to submit the proper incorporation paperwork to the state. While some entrepreneurs choose to incorporate in their home state, founder of high growth startups will want to incorporate as it is most familiar to investors and business-friendly.
The necessary details to include in this document are the startup or business name, address of the incorporator, business purpose, a total number of shares, or stock that can be issues and address of the registered office.
A term sheet is a non-binding agreement that lays out the features, conditions, and terms of the financial investment of a startup. Some people compare a term sheet to a prenuptial agreement; just like a prenup, the term sheet outlines the agreement both parties are making before they officially begin their relationship.
It is fairly easy to obtain sample term sheets online or generate your own through free tools provided by the law firms. While the information on a term sheet may seem overwhelming, its main contents can be simplified into two concepts: who controls what, and what happens to the investment in the event of an exit. The document is divided into three major sections, which include corporate governance, funding, and liquidation.
Investors’ Rights Agreement
An Investor’s Right Agreement or IRA details the rights of the investors with regard to their investment in the company. The key points in this document include the fowling: Participation rights, right of first refusal, right to maintain ownership, corporate governance, and information rights.
Stock Purchase Agreement
A Stock Purchase Agreement or SPA is an agreement that dictates the terms and conditions pertaining to the purchase and sale of shares. It encompasses the following aspects: Share Price, Number of Shares, Dispute Resolution Provisions, Regulations and outcomes regarding the transfer of shares, etc.
A Stock Purchase Agreement is necessary because it provides protection for both you and the investor. It allows you to demonstrate to the investors that you are the legal owner of the stock being sold.
Also Read: How to get funding from Venture Capital?