Venture capital can be a key source of financing for startups and emerging businesses that may not yet have access to traditional forms of funding, like bank loans. But if not done with attention to detail and the right team, raising capital can distract you from selling and operating your business.

This article highlights key legal areas to focus on for companies looking to raise their first round of financing. There is no single magic formula, but these tips can save you time and money.

Where to Start

Get started by engaging a qualified attorney who checks the following boxes:

1. A corporate lawyer with experience advising early-stage companies raising venture capital.
2. Someone who you enjoy working with and can trust. Meet candidates in person before making any decisions.
3. Work with a lawyer with connectivity into multiple legal departments. This could mean someone at a mid-size to large law firm or a well-connected solo practitioner with contacts in other areas. As you grow and scale, you will face a wider array of questions, so it becomes invaluable to have your corporate attorney quarterback discussions that involve experts in other practice areas (e.g., a question about an office lease you want to sign, how to handle a commercial dispute, or whether it is time to file for intellectual property protection). Navigating this alone or jumping around many law firms could be time-consuming and costly.

Where to Incorporate

Top choice: Delaware C corporation. In most cases, this is the expectation for legal entity status. If you have already formed your legal entity and it is not a Delaware C corporation, talk to your investors about options. If you have, for example, a Florida limited liability company today, you are not doomed. You can convert that entity into a Delaware corporation without impacting your existing business. If you decide to convert, do not start preparing documents until you have an investor’s term sheet, and do not formally convert the entity until a day or two before the initial closing. You do not want to deal with converting the entity until you have certainty of close.

Foreign qualifications. Let’s say you convert your Florida limited liability company into a Delaware corporation, but your business remains unchanged. Your offices and employees are still in Florida. You will still need to file with the Florida Secretary of State to do business in Florida, in what is known as a foreign qualification. This applies for any other states where you are doing business, so if you have offices with employees in Massachusetts, California, and Georgia, you should also file in those states. States differ in what they consider “doing business.” Explain your state-by-state operations to your attorney, and they will be able to guide you on where to file.

Template Legal Contracts to Keep on File

Build out a library of template contracts that are balanced, concise, and protective of your business. This way, when you have an opportunity with an employee, customer, or key service provider, you can quickly execute your contract, close the opportunity, and turn to the next one. I would make sure to have a template of (at least) the following:

• Non-Disclosure Agreement (NDA): No more than one page long. Longer NDAs and NDAs with non-standard terms can slow down conversations and kill momentum in critical early-stage conversations. Keep it simple.
• Customer Agreement, Service Provider Agreement, and Employment Agreement: Keep these simple, too, but cover your intellectual property. A key focus area in all of these templates is safeguarding any of the business’s intellectual property from potential disputes. If the proper steps are not taken, you could risk your business losing ownership of the intellectual property to an unintended third party or find yourself in a situation where you are spending time disputing ownership instead of selling and operating your business. All customers, employees, and service providers (regardless of their position or contribution to the company) should agree to a clause that clearly assigns and directs intellectual property ownership back to your company and never into the hands of the customer, the employee, or the service provider.
• Equity Option Documents: Startups often issue stock or equity units to their employees to attract talented employees and give them skin in the game. It is well worth your time to understand your options here and have template agreements in place that align with your intentions. Mistakes at this stage can have unintended tax and ownership consequences down the line that can be expensive and a headache to correct.
• Pre- and Post-Money Cap Table: One that you understand, can explain, and have documentation to back up (i.e., if you have granted X employee stock options, you should have the stock option plan and grant available on file to back up the cap table). A cap table shows a complete list of all the company’s ownership expressed in share count and percentages in an Excel spreadsheet. The pre-money column will show your ownership before taking investor capital, and the post-money column will show the ownership of your company after investment. The lawyers, investors, co-founders, and accountants will all want to see this document, so make sure it’s perfectly clear and accurate.

Time to Fundraise

Fast-forward past the pitches, the due diligence, and the meetings. When it comes to getting to closing and signing documents with investors, here are two pieces of advice:

First, make sure you have all critical economic and control rights documented in a term sheet with your investors prior to exchanging definitive investment documents. Starting to negotiate term sheet items at the definitive document stage will almost always lead to more time spent and a higher likelihood of deal fatigue. In a bad scenario, you may learn you have a fundamental disagreement that you could have discovered far sooner in the term sheet stage.

Second, include in your term sheet that the parties will use a set of model documents issued by a familiar, nationally recognized source. If your investors use a Simple Agreement for Future Equity (SAFE), the documents should come from Y Combinator. One option for convertible notes is the Angel Capital Association, which recently published a convertible note that is gaining attention. For Series A Preferred Stock, the National Venture Capital Association (NVCA) model documents are the standard starting point. That being said, even if you are raising a Series Seed round, it likely makes sense to use the NVCA model Series A documents adapted to fit the terms of your Series Seed round. This can set you up for easier negotiating when raising your Series A round and allow you to move more efficiently through the Series A documentation process.

Hopefully, these tips will help you move more efficiently through fundraising and get back to selling and operating your business. Best of luck to you!

The information provided here is for general informational purposes only and is not intended as legal advice. It is not a substitute for professional advice or consultation with a qualified attorney. Please consult with a licensed attorney for advice specific to your situation.