How Should You Rebuild Your Legal Function After Series A?

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Once a Series A financing closes, the environment surrounding the business changes significantly in a short period, with more recruiting interviews, more contracts with business partners and regular reporting to investors. Contract review, shareholder relations, labor management and the development of internal rules all start moving at once, and it is a period in which it is easy to become unsure where to begin.

At this stage, I think the task is to build a decision-making system that fits the way the business operates, rather than hurrying to set up the same administrative departments as a large company. What is needed is a system in which legal identifies issues at an early stage and presents options that make it easier for management and frontline staff to act.

It is natural to want to hire a dedicated in-house legal staff member, but the number of contracts, shareholder matters and labor consultations varies from month to month. Since hiring increases fixed costs while the volume of matters fluctuates, a realistic option is a system that positions outside counsel like an in-house legal team and entrusts them not only with contract review but also with developing templates, handling shareholder relations and organizing issues for management decisions.

Legal Involvement from the Negotiation Stage

The practice of sending only the final check of a contract to legal tends to reach its limits after Series A. This is because the scope of liability, ownership of intellectual property, exclusivity clauses and the like are difficult to revise once the terms with the counterparty have been settled. The greater the impact on revenue, and the more a matter involves a new business or a foreign company, the more meaningful it is to grasp the issues at an early stage.

The purpose of consulting legal early is not limited to proceeding cautiously with negotiations. If, in the first half of negotiations, the company can consider how far it can concede, whether there are clauses that would be hard to explain in a future financing or M&A, and whether it can offer alternatives to the counterparty, legal functions not merely as a constraint on the business but as support for negotiation design.

One reason early consultation does not take hold is that legal is not aware of how negotiations are progressing. By sharing the matter management sheet and minutes of sales meetings, taking authority and confidentiality into account, or by setting a common rule that legal is notified in advance of transactions above a certain size and new matters, the company can avoid placing the burden of early consultation solely on the individual in charge.

Building Contract Review Criteria and Using AI

After Series A, the types of contracts handled become wide-ranging, such as service agreements and joint development agreements. If management or particular individuals alone keep making decisions, the criteria tend to vary from matter to matter. By setting in advance the conditions the company considers important, such as transaction amount, contract term and cap on damages, it becomes easier to maintain a consistent level of quality no matter who does the review.

As a way of organizing the criteria, classifying each clause into three tiers, "accept as a rule," "request a revision" and "escalate for a management decision," makes it easier to align perspectives with newly joined staff and outside counsel. By briefly recording the conclusion and reasoning in cases where a decision was difficult, those cases accumulate as material for revisiting the company's review criteria.

First-pass contract review and issue extraction by AI are practically useful for making the work more efficient. On the other hand, final judgments that take into account the company's negotiating leverage, governance after the financing and the possibility of a future IPO or M&A remain an area for which attorneys and management take responsibility.

Shareholder Relations and Day-to-Day Operation of Stock Options

The prior consent matters and information obligations set out in investment agreements and shareholders' agreements are not procedures that end when the financing closes. If the company does not keep track of which decisions in day-to-day management require investor consent or prior reporting, there is a risk of proceeding without the necessary consent and having this pointed out at the next financing or during due diligence.

When strengthening recruitment, the design and operation of stock options also become an issue in parallel. How the plan is received internally can change depending on the selection of grantees, exercise conditions and tax requirements. By keeping the next financing round and future hiring plans in view and checking the operation with each grant, it becomes easier to prevent rework later. It is also important to cross-check, with every grant, that there are no discrepancies among the grant agreements, the resolutions of the shareholders' meeting, board of directors or other bodies (the required resolutions and decision-making bodies differ depending on the type of company and the content of the issuance), and the capitalization table. If discrepancies are left in place, they may be pointed out in the next round's review, and the company may find itself scrambling to make corrections in the middle of the financing schedule.

Labor and Internal Rules as the Organization Grows

After Series A, headcount often increases rapidly. As the organization grows, putting in place work rules and employment contracts and preparing for harassment issues become practical challenges.

There is no need to put in place a comprehensive set of rules like a large company from the outset. It is realistic to establish practical rules suited to the company's actual circumstances, based on current headcount, hiring plans, how remote work operates, the extent to which contractors are used and how trade secrets are managed. In particular, the substantive distinction between outsourcing and employment, the risk of unpaid overtime and the design of the consultation desk become more burdensome to correct after headcount has grown, so early review is advisable.

Monthly Operations Using Outside Counsel and Recording Decisions

Immediately after Series A, it may be difficult to put a dedicated legal staff member in place quickly. In the meantime, contract review and shareholder relations continue. Consultations on intellectual property and labor rules may also arise. By not limiting outside counsel to a place to consult only when trouble occurs, and instead building them into day-to-day operations, including the consultation desk, prioritization of contract review and the reporting line to management, it becomes easier to handle the workload of this period.

The way you consult outside counsel can also be refined. Simply asking them to review a contract tends to yield only formal revision comments on the wording. I think consulting from perspectives such as "we want to prioritize winning revenue, but which conditions can we not give up?", "are there clauses likely to become issues when explaining to investors?" and "are there realistic alternatives we can propose to the counterparty?" yields advice that is easier to use for management decisions.

Another key point is not to leave legal issues solely with the individual in charge or the administrative department. Limitation of liability in large transactions, IP ownership in joint development, investor prior consent matters, stock options of departing employees and the risk of unpaid overtime can be too heavy a burden to judge on the ground alone. When using outside counsel, it is effective to have them present a comparison of options rather than narrowing to a single conclusion: the risks of accepting the counterparty's proposal, the negotiation points if requesting revisions, and the business impact of forgoing the transaction. This helps support quick decisions at management meetings.

After a decision is made, keep a concise record, not a lengthy report, that shows the options considered, the policy chosen and the remaining risks. Whether you can explain the business background at the time, the risks you were aware of and the response policy when investors, audit firms or prospective buyers ask for confirmation in the future depends on whether a record remains. In my view, building a legal function is less about increasing paperwork and more about accumulating a decision-making process that allows the company to fulfill its accountability.

As for how to run operations, rather than launching a large legal project all at once, another approach is to review matters monthly. Grasp the number of reviews and the important contracts not yet signed, and confirm planned investor approvals and stock option grants. Items still outstanding in labor and information management can also be revisited on this occasion. By adjusting the intensity, with more support during busy periods and a lighter load when matters are quiet, it becomes easier to balance costs against the support needed. The scope of our monthly retainer support and support during financings is described on our Startup Legal and Fundraising Support page.