After understanding the basics of Seed Financing in the previous blog Seed Fundraising: Everything you must know before approaching Investors, let us now dig into the Important Documents you must know about before Seed Fundraising”
The paperwork for raising the Seed Finance is of paramount importance as it clearly defines the deal and forms the basis that governs the future understanding between the Founders and the Investors.
The paperwork ranges from the base document(s) being the “Term Sheet” and the “Business Valuation Report” (that are used by the Founders to pitch the Seed Investor(s) for making the investment in the Startup), to the execution of the Share Subscription Agreements (SSAs) and the Shareholders Agreements (SHA) which explicitly labels the economics of the deal and the control to which the Seed Investor(s) will be entitled to post their investment.
Five Quick- Important documents involved in raising the Seed Finance:
NON-DISCLOSURE AGREEMENT (NDA) is signed between the Startup and the potential investor(s). This is done at the time of commencement of the initial talks with the potential seed investor(s), and it is signed to ensure that the Seed Investor protects the secrecy and the confidentiality of the information being shared by the Startup (to facilitate Seed Investment). However, don’t straightaway talk about signing the NDA with your potential Investor as it might break the deal. Lot of Investors don’t like when Founders are very uptight about signing the NDA first before they proceed ahead with other stuff. You can sign it during rest of the paperwork or warmly put forward a request for signing NDA.
TERM SHEET is a significant document that envelops the deal structure by clearly elucidating the terms of investment including the price per share and the Pre-Money and Post Money valuation of the Company. It is non-binding in nature and the proposed investment is subject to formalisation by Share Subscription Agreement and the Shareholders Agreement. Term sheet broadly has two provisions – Economic Provisions and Control Provisions. Economic provisions govern the commercial part of term sheet and includes price per share, participation by Investors amongst other things. Control provisions lay out the powers, rights and preference Investors will have over Founders.
BUSINESS VALUATION REPORT evaluates the Fair Value (valuation) of shares of the Company i.e. the price per equity share of the Company as on the date of Seed Investment. The Higher the valuation of the Company, the more lucrative it appears to the potential Seed Investor.
LETTER OF INTENT (LOI) signifies the interest of the Investor in making the proposed investment in the startup; this is subject to the completion of the due diligence process, provision of additional information and fulfilment of certain conditions precedent by the Startup.
DUE DILIGENCE REPORT: The proposed investor conducts due diligence of the complete business of the startup. A positive Due Diligence Report further assures the investor about its investment in the startup.
SHARE SUBSCRIPTION AGREEMENT (SSA) is entered into by and between the Startup and the proposed Investor, thereby defining the mechanics of the proposed Investment in the startup. It is a share offer document by the Startup and promise by the Investor to subscribe to the shares of the startup that binds the parties to the deal and sets out the investment process to be followed.
SHAREHOLDERS AGREEMENT (SHA) is an agreement between the Investor and the existing shareholders of the startup thereby defining a common understanding between them with respect to the economics of the deal, the extent of control i.e. rights and privileges of the Incoming Investors, the duties and liabilities of the Founders, the Reserved matters, the terms governing the further fundraising, the Anti-Dilution measures, and the Liquidation Preference for the Investor(s).
For the purpose of drafting and executing all of the aforesaid documents, a good startup lawyer should be appointed for the task, as it involves an in-depth analysis and understanding of the deal structure governing the future understanding between the parties and compliances with the laws of the land.
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