When a Startup Should Consult an Attorney about Fundraising
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
In startup fundraising, the time available for preparation depends on when you consult an attorney. Many companies consult only after an investment agreement or shareholders' agreement has arrived, but I think that consulting before the contract arrives makes it easier to review past procedures as well.
Fundraising in practice is not completed simply by affixing a seal to a contract. There are matters investors check in advance, such as the design of the capital policy, the procedures for past share issuances and the design of stock options. As the company progresses toward Series A, the scope of legal due diligence also widens. The specific scope of support and fees, including J-KISS, investment agreements, shareholders' agreements and stock options, are listed on Startup Legal Counsel and Fundraising Support.
Preparation before the Investment Agreement Arrives
If you start reviewing past procedures only after the investment agreement arrives, the fundraising schedule may lose its slack. For example, minutes of shareholders' meetings or payment certificates for past share issuances may be missing, the shareholder register may not have been updated, there may be gaps in the issuance procedures for stock options, the ownership ratios among founders or the treatment of intellectual property may remain unclear, or contracts with important service providers may not clearly state who owns the rights.
Such issues cannot be resolved simply by revising the clauses of the contract that has arrived. They involve re-checking the materials on hand, coordinating with the people concerned and making corrections according to the deficiencies. If procedural deficiencies are found once negotiations on terms with investors are under way, explaining them to investors can also take time.
Arrangements at the Seed Stage
Even at the seed stage, there are several issues that should be shared with an attorney in advance. The first thing to check is the arrangements among founders. Ownership ratios, each person's division of roles, and to whom intellectual property developed before founding belongs can be hard to get the parties to agree on if you try to adjust them later.
Next to address is the capital policy. In fundraising through J-KISS or class shares, check future dilution, the conditions for conversion into preferred shares and the effect on the next round. Consider not only whether the proposed terms are close to the standard in investment practice, but also whether they suit your company's growth strategy.
Stock options should also be considered from an early stage. When using tax-qualified stock options, check the issuance procedure under the Companies Act separately from the tax-qualification requirements. Match the issuance timing, exercise price and so on against the resolution documents and allotment agreements, and for matters requiring registration, also confirm consistency with the commercial registry.
Key Points to Check in Advance toward Series A
When the Series A stage arrives, the legal review on the investor side becomes considerably more detailed. Basic company materials such as the articles of incorporation, the certificate of registered matters, the shareholder register and the history of past capital increases are reviewed.
In particular, at companies offering SaaS or AI services, attention is paid to the terms of use, the privacy policy and how customer data is managed. For AI-based products, the origin of training data and compliance with the terms of use of external AI services are also included in the review.
If you try to put all these documents in order at once just before Series A, the company may not be able to handle it all internally in a short time. I think it is preferable to keep legal due diligence in mind from several months before starting to raise funds and to organize the materials.
Milestones That Prompt a Consultation
Milestones that can prompt a consultation include the following. This is because, after receiving a draft contract, the time available for reviewing procedures is constrained.
- The stage of considering the first round of funding from outside investors
- The stage before receiving a draft J-KISS or investment agreement
- The time when you begin designing a stock option plan
- The time when meetings with investors toward Series A are increasing
- The time when you begin handling legal due diligence or setting up a data room
- Before concluding a master agreement with a major customer or a core service agreement
In fundraising, it is necessary to view not only the wording of contracts but also the history of procedures to date in connection with future business development.
When to switch to an ongoing retainer, and how to compare fundraising experience, deliverables and fee terms, can be found in How to Choose Outside Counsel for a Startup.
The Scope of Work Worth Consulting On
The purpose of using an attorney in fundraising is not limited to cutting the risks in the investment agreement. It also includes putting in place a structure that can explain things logically to investors, keeping the company in a state where obstacles are unlikely to arise in future fundraising or M&A, and enabling management to spend their time running the business.
At LegalAgent, we do not limit fundraising support to revising contract clauses; we provide consistent support covering the coherence of the capital policy, stock option design and preparation for legal due diligence. I think that checking at an early stage makes it easier to find time to compare methods and negotiate terms.
Legal Support Services for Fundraising
We provide a range of legal support from the preparatory stage before an investment agreement is presented.
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