Some of the biggest concerns for seed and early-stage startups revolve around money. How to get it and where to get it. Even the greatest and most innovative ideas require capital to get off the ground. Listed below are different ways startups can get the funding needed to be successful in the early seed stages and some of their legal requirements.
Many startup founders invest their own capital into the business. If you are able to do so, this is a great way to show investors that you are serious by “putting your money where your mouth is” so to speak. By investing in yourself and your business until you are ready for a round of funding, you accomplish three goals: 1) getting your startup rolling, 2) attracting other investors, and 3) not having to give away equity early on.
Legal Requirements: None
Entrepreneur.com describes Angel Investors as “wealthy and willing to invest hundreds and thousands of dollars in your business in return for a piece of the action”. These investors are usually professionals and seasoned entrepreneurs who are defined as “Accredited Investors” by the SEC. The SEC defines an accredited investor as an individual with a net worth of at least $1 million and makes at least $200,000 a year.
Legal Requirements: May require legal documentation for the Private Placement according to SEC Regulation D, such as a Private Placement Memorandum (Offering Memorandum) and must file the raise with the SEC.
Provide funding to emerging small businesses in early stage that have established a high growth potential. One of the perks of venture capital funding is that it will usually come with advisors and mentorship designed to ensure your company’s successful growth. The downside is that you will have to likely have to give away a significant amount of your ownership equity and control in your company. Venture Capital can fund anywhere from $500,000 to $5 million in early and seed stage startups. In exchange, your investors become limited partners in the startup.
Legal Requirements: Venture Funds will want to conduct due diligence on all company legal documents such as Operating Agreements, Shareholder Agreements, and written contracts to understand how the equity is shared and ensure corporate governance is in place. Also, Private Placement legal documentation and SEC filing may be necessary.
Grants & Loans
The Small Business Administration offers grants and loans that startups can benefit from if they meet the specific qualifications. For many small businesses with an interest in SBA loans for working capital in the amount of $500-$5.5 million, you can go to your local community bank and apply. To find a lender near you go to: https://www.sba.gov/funding-programs/loans
There are also many different grants that your startup or small business may qualify for that do not require repayment but do have restrictions on how the funds can be spent. To explore the different types of SBA grants you can go here: https://www.sba.gov/funding-programs/grants
There are many other grants from private sponsors and corporations that you can find online as well.
Legal Requirements: May require an attorney to assist with grant and loan applications and also to review and prepare loan documents and security agreements if any are applicable.
Legal checklist for early-stage startups
In the early stages of startups many entrepreneurs are so focused on their product or raising capital, that they bypass the legal aspects of starting and running a business. While the legal portion of starting a business may seem tedious and daunting for new startups, the legal steps are imperative to the success and profitability of the business. If not addressed early on, the following legal checklist items, as reflected in this Forbes article, will inevitability be very painful and costly later down the line.
1. Partnership or Founders Agreement
This will likely be the very first and most important legal document for startups if there are multiple founders. Here are some of the legal questions the Partnership Agreement will address to ensure all founders are on the same page regarding the business and their positions to prevent costly litigation down the line:
Deciding whether you should form your startup as an LLC or a C Corp is a very important legal decision that comes with serious financial and other implications. For instance, most venture capitalist require startups to be formed as c-corps. You can see more about organization structure and documents here.
C Corporations are governed by state law and most are incorporated in Delaware. This type of business entity is favorable for investors because the structure supports investment protection through shareholder agreements, board of directors, and stock options.
Limited liability companies are also governed by state law and have more favorable tax implications. Unlike, C corporations, LLCs offer flow-through taxation and protection to its members but its structure does not support investments.
3. Confidentiality Agreement or Non-Disclosure Agreement
Before disclosing your startup's product or business idea to other parties you should make sure they sign a confidentiality agreement also known as a non-disclosure agreement. By signing this agreement the party receiving the information agrees not to further disclose the protected product or idea to another party. In its early stages, you want to make sure you implement the necessary protocols to keep your information secret.
4. Intellectual Property Assignment Agreement
When individuals or companies are hired to create a product for your startup you want to make sure they assign all trademark or inventor rights to the product and designs to you. This will ensure your startup owns the rights to the intellectual property and has the exclusive right to its use.
5. Intellectual Property Protections
In the early stages it's important to secure intellectual property rights to your startup's product and brand. These rights prevent others from taking your idea or product and brand and copying it. Securing IP rights also allow you to monetize through licensing later down the line once your product enters commerce. For information on federal trademark registration you can refer to our services here.
If your startup has not crossed out items on this list, you can contact us here to schedule a consultation. We are here to serve.