Legal Infrastructure for Fundraising Success: Documentation and IP Strategy

Legal documentation requires careful consideration across multiple dimensions. Before initiating fundraising processes, validate with legal teams that your "corporate house is in order"—ensuring all legal documentation is current and compliant from incorporation through present operations.

Fundraising requires several essential legal documents including term sheets, shareholder agreements, subscription agreements, and articles of incorporation, among others. Term sheets outline key investment deal parameters, while shareholder agreements formalize company-investor relationships. Subscription agreements represent contracts between investors and companies, detailing investment terms and securities being purchased. Articles of incorporation establish legal company existence and outline corporate purpose, structure, and governance frameworks. Working with experienced legal counsel ensures proper document preparation and regulatory compliance.

Your legal team should provide comprehensive support throughout this process. However, begin considering "corporate housekeeping" requirements early rather than late in the process.

Non-disclosure agreements (NDAs) represent contracts establishing confidential relationships between parties. These agreements typically define confidential information, usage parameters, and breach consequences. Let's examine NDAs specifically in fundraising contexts, as industry practices have established specific protocols.

Many founders instinctively seek generic NDAs for security during investor presentations. NDAs can benefit startups in certain contexts, such as pitching to competitors, strategic partners, contractors, or new employees. However, fundraising industry practices differ significantly.

Investors and VCs rarely sign NDAs, though this varies by industry (deep technology startups versus software companies). Generally, avoid presenting NDAs to investors. Investors meet hundreds of entrepreneurs weekly, seeing diverse business models. The legal exposure and risk of signing NDAs for each founder meeting creates excessive liability.

While exceptions exist, consult legal counsel regarding best practices, recognizing that fundraising with NDAs is highly unusual.

While this section won't cover comprehensive IP (Intellectual Property) management best practices for founders, this represents a critical discussion area with legal teams.

Intellectual Property Definition

While patents represent important intellectual property, they constitute only one type of valuable corporate IP assets.

For most startups, intellectual property takes multiple forms. Software often represents the most identifiable IP asset, potentially forming the foundation of company product or service offerings. Branding represents another key IP portfolio component, typically consisting of company and product names and logos. Further along the IP spectrum, presentation materials, reporting templates, employment policies, and daily operational documentation all contain important intellectual property that's sometimes overlooked.

Intellectual property represents valuable startup assets, making protection crucial for long-term success. Here are key IP types and their protection mechanisms:

For many startups, intellectual property represents business lifeblood. Beyond forming product and service offering foundations, IP defines customer interactions and operational methodologies. Given IP importance, every startup should structure affairs ensuring ownership of business-related intellectual property.

IP ownership legal frameworks differ by IP type. Under patent law, inventions typically belong to inventors unless agreements specify otherwise or circumstances favor employer ownership.

Copyright ownership, applicable to software code, process manuals, and other works, involves more complexity. Typically, copyright belongs to authors. However, if authors created works during employment, employers own the works. So if non-employees (directors, founders, consultants, independent contractors) develop software or materials subject to copyright, companies won't own software and materials unless agreements specify otherwise. Even if companies paid consultants for work creation, companies may not own resulting rights.

Trademark law differs from copyright and patents, as trademark rights in names or logos arise when names or logos are used with goods and services. However, if company branding (slogans or logos) is developed by employees or outside consultants like advertising agencies, copyright in those items follows the framework described above.

Optimal intellectual property asset protection requires proactive approaches.

Initially, all founders, contractors, and consultants should sign IP assignment agreements transferring any IP creation ownership to companies. When hiring employees, employment agreements should contain provisions confirming company ownership of employment-related IP creation. Similarly, agreements with outside contractors or consultants, whether advertising consultants or software developers, should clearly assign all IP rights to companies.

After settling on company branding, conduct searches identifying others using similar branding. Once finalizing branding, registering names and logos represents important protection steps.

While these steps are often overlooked for various reasons, diverting attention and limited resources from core business growth, losing IP tracking can cost significantly more long-term. Sophisticated investors or acquirers always inquire about IP ownership, and obtaining rights after-the-fact can be time-consuming and expensive. Similarly, rebranding is costly and likely damages brand equity, so pursuing early trademark protection helps finalize brand strategy and provides valuable legal rights.

Before launching new products or services, conducting comprehensive IP searches is ideal for ensuring your intellectual property doesn't infringe existing rights. IP searches help identify similar trademarks, copyrights, or patents that may create conflicts. Engaging legal professionals or IP specialists assists in conducting thorough searches and analyzing results to mitigate potential infringement risks.

Various legal challenges arise at different fundraising stages. Considering these legal challenges and ensuring necessary compliance steps helps organizations achieve successful fundraising while avoiding legal difficulties.

Pre-seed Stage

Preparing and executing legally binding agreements, including term sheets and subscription agreements, to document fundraising round terms is crucial. Rather than viewing this startup funding stage as merely a 'friends and family' round, ensure business entry with proper term sheets and confirm every party's stake. These represent startup funding legal process fundamentals—contract legality at seed funding is critical and must be treated seriously. This provides long-term protection.

Series A Stage

This represents 'external' startup financing options entering businesses. This is when venture capitalists attempt maximizing gains relative to equity stakes. Ensure you have agreed-upon term sheet provisions.

Series B and Beyond

As startups gain traction and generate increased revenue, investment for startups increases in magnitude. More heavily financed funding rounds here mean rules and regulations matter more significantly. Lawyers are needed to draft, review, and submit documents that sophisticated investors require.