A Legal Checklist to Review Before Your Series A
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
A Series A financing is not simply a matter of signing an investment agreement and receiving funds. It is an occasion on which the company's business plan, capital policy, and shareholder structure, as well as its management structure and past procedures, are examined. For an overview of the steps for putting legal matters in order between the seed stage and the Series A, see What Is Startup Legal? An Overview of the Legal Work Needed from Seed to Series A.
At the seed stage, companies often prioritize moving the business forward, and contracts and internal rules may be put in place later. However, once the company reaches the Series A stage, it must also deal with matters it had been putting off. This is because investors check not only the growth potential of the business but also whether the company has a structure that can scale its business going forward.
The purpose of organizing the items to check in advance is not limited to formally confirming whether documents or clauses exist. It is preparation for management to decide which risks to accept, which items to fix in advance, and how to answer investors' questions.
During this period, some companies see more consultations relating to management decisions, even if the workload is not large enough to hire a dedicated legal staff member. Rather than using outside attorneys only for one-off document reviews, one option is a structure in which they review matters across the business plan, contracts, and shareholder relations, much like an in-house legal team member. Start by checking the capital policy and the investment agreement and shareholders' agreement. Intellectual property, terms of service, privacy policies, and shareholder relations are also in scope.
Capital Policy and Future Dilution
The first thing to review is the capital policy. It is important to be able to see at a glance the founders' shareholding ratio, the ratio held by existing investors, the stock option pool, the number of shares issued in this round, and the dilution after the next round. If the ownership percentages of the founders and key members who have contributed since the early days are diluted too much too early, it can become difficult for them to maintain their motivation for future growth.
In practice, there are cases where a company focuses only on the amount it can raise at the immediate valuation, and as a result the stakes of the founders and key members are diluted in subsequent financings or a sale of the company, sapping their motivation for the business. In addition, if past investment agreements contain veto rights or preemptive rights, this directly affects the adjustment of terms with new investors. In a Series A, the capital policy and contract terms are not considered in isolation; they are reviewed together with the business plan for how the company will grow.
Investment Agreements, Shareholders' Agreements, and Management Flexibility
When reviewing investment agreements and shareholders' agreements, it is essential to consider not only whether each clause is favorable or unfavorable but also how much management flexibility will be preserved after the financing.
If the matters requiring prior consent are overly broad, the company may end up having to seek investor approval even for routine decisions such as hiring and investment in new businesses. It is natural for investors to be involved in important company matters, but check whether the approval items are too broad in light of the stage of business progress and the relationship of trust with the investors. In particular, unless the wording "conclusion of important contracts" is given a monetary threshold or a standard based on the impact on the business, it may end up covering even ordinary sales contracts. The same applies to borrowing, establishing subsidiaries, and revising officer compensation, and it is important to define, in both the contract provisions and actual practice, where investor approval begins and how far management can proceed at its own discretion.
In the investment agreement, check the terms of the preferred shares, the deemed liquidation clause, the matters requiring prior consent, the representations and warranties, and so on; in the shareholders' agreement, check share transfer restrictions, rights of first refusal, drag-along rights, and so on. Think not only about whether a clause is standard for investors but also about it in light of your business and hiring plans. Also confirm that it will not restrict decision-making more than necessary in the next round or a future M&A. Further, the founders' exclusivity and non-compete obligations and share buyback clauses upon departure may look like formal clauses at the time of signing, but they can constrain management's paths and the company's options several years later, at the time of a business pivot, an M&A, or the next financing. It is important to review them with those future situations in mind.
Ownership and Licensing of Intellectual Property, and Service Agreements
A startup's corporate value depends heavily on the products and technology it has developed and the data it has accumulated. If the company proceeds to a Series A with the rights to its intellectual property unclear, explaining them in due diligence will take a great deal of time. If it remains ambiguous who holds the rights to the deliverables, this becomes a source of concern not only for investors but also for future potential acquirers.
In particular, where external engineers, designers, members working on a side-job basis, or contractors were involved in development during the founding period, you must confirm that the company holds the necessary rights to the deliverables or has obtained the licenses needed for the business. An explanation that there was an oral agreement alone may not be regarded as sufficient grounds by investors or parties considering an acquisition. Check the service agreements, non-disclosure agreements, employee invention rules, and copyright assignment clauses, and if there are deficiencies, consider whether they can be remedied with additional agreements or the like. This is because attempts to fix things later tend to run into difficulty, as the company may be unable to contact the people involved or may face renegotiation of terms.
Terms of Service, Privacy Policies, and Business Reality
Around a Series A, the number of users, the number of business partners, and the types of data handled expand significantly. If the terms of service and privacy policy drafted in the early days are left as they are, discrepancies arise between the current service and what the documents provide.
The types of personal information obtained, the purposes of use, and clauses on the use of generative AI are typical items that tend to require amendment as the business develops. For the terms of service, also check whether provisions such as prohibited conduct, the scope of disclaimers, and the cap on damages match the current business model. Legal documents become outdated as the business grows even if they were appropriate when drafted, so the preparation period for a Series A is a good opportunity to correct gaps between reality and the documents.
Shareholder Relations, Records of Corporate Resolutions, and Explanations
In Series A due diligence, the shareholder register and past share issuance procedures are examined. The minutes of shareholders' meetings and the content of investment agreements are also investigated. Due diligence is not a procedure that guarantees there are no problems; it is an investigation to identify potential risks. Because the necessary corporate approvals and records are judged according to the nature of the company and the transaction, it is important not only to have the documents in place but also to be able to explain logically the reasons for each issuance and to whom shares were allotted on what terms.
Investors may ask for detailed explanations where, for example, only simple agreements remain from early financings, the treatment of shares held by departed members is unclear, or the shareholders' meeting resolution for stock options is inconsistent with the content of the allotment agreements. The role of legal is not limited to pointing out problems; it is to support management's decisions by sorting out the matters that should be fixed immediately, the matters it is enough to address before the next financing, and the matters on which understanding can be obtained by explaining them to investors.
A Legal Structure and Point of Contact Suited to Your Growth Stage
In legal preparations ahead of a Series A, the realistic approach is to set priorities and work through items in order, starting with those investors are likely to point out, those that are costly to fix later, and those that constrain management decisions.
At LegalAgent, we have a structure in which AI and attorneys work together to move quickly through reviews of startup fundraising, investment agreements, stock options, and more. We use AI to speed up tasks such as identifying issues, taking inventory of contract documents, and preparing first drafts of revised wording. On the other hand, which risks the company will accept, how to explain matters to investors, and where to concede and where to hold firm in negotiations are areas in which attorneys should make judgments together with management. Rather than simply redlining contracts, we prepare and share negotiation memos that management can use in discussions with investors.
Even at a stage where there is no dedicated legal staff member in-house, there are ways to supplement the legal function in line with the workload by using outside attorneys on an ongoing basis. Besides expanding the administrative departments in advance, the company can also consider using outside legal support in line with its growth stage and the rise and fall of matters. It is possible to use it differently at each stage: before the financing, focus on firming up the investment agreement and shareholder relations; after the financing, put stock options and labor matters in order as headcount grows; and as the next round comes into view, prepare the due diligence materials. Shifting the focus of legal work in line with the company's growth stage is effective within a limited budget.
As a rule, we provide an initial response within one business day, and we also offer services that can be handled for a fixed fee. If you cannot decide where to start in preparing for a Series A, we can begin by considering priorities based on your existing cap table, key contracts, and terms of service.
If you would like to consult us about reviewing your capital policy or investment agreements, please use the following contact point.
Services connected to this topic