A Founders Guide to Fundraising
Here at NEXT powered by Shulman Rogers and My NEXT Raise, our mission is simple: Empower Startup Success. This means that we’re 100% focused on supporting startups throughout their life cycle from launch to capital raising, to scale and growth.
Why do founders spend such an inordinate amount of time pursuing investors? For one simple reason: capital is like oxygen for an emerging growth company – without it, no startup can survive.
But while identifying, approaching, and convincing potential investors to take a chance on your startup might seem daunting and somewhat overwhelming, it doesn’t have to be.
We’ve prepared this guide to help founders like yourself develop a better understanding of the fundraising process, provide the insights you need to effectively navigate your fundraising journey, and offer some tips and strategies for getting your company on the path to fundraising success.
Don’t forget to join our waitlist for the launch of our new My NEXT Raise investor readiness platform.
Schedule your free intro call to launch your fundraise Today!
TABLE OF CONTENTS
CHAPTER 5: WHEN AND WHY DO YOU NEED A 409A VALUATION?
CHAPTER 6: FINANCING STRUCTURE
- Equity Basics for Entrepreneurs: Webinar
- The ABC’s of Equity Fundraising
- Convertible Notes vs SAFEs
CHAPTER 7: OPERATING A SUCCESSFUL STARTUP
- A Founder’s Big Four for Building a Team
CHAPTER 8: LEGAL GUIDANCE IS THE KEY TO ANY STARTUP’S SUCCESS
CHAPTER 1: MULTIPLE PATHWAYS TO EARLY FUNDING
Securing funding is a pivotal challenge for many early stage companies that can determine the trajectory of the business. Even though venture capital (VC) is an important source of funding for startups, it is just one of the many available paths for early stage companies. Considering options outside of VC will not only expand a company’s funding scope, but may also lead to a variety of opportunities that may better align with the company’s goals, stage and needs. Investor readiness plays a critical role in this funding journey, ensuring companies are well-prepared to attract investment, regardless of the financing method chosen. Here, we will explore several funding alternatives that early stage companies should consider utilizing.
1. SEED STAGE VC
Seed stage VC provides initial funding for early stage companies to launch their business ideas and validate market potential. Unlike traditional VC, which typically invests in more established firms with proven revenue and market traction, seed stage VC focuses specifically on nurturing startups in their early phases.
2. ANGEL INVESTORS
Angel Investors are typically experienced entrepreneurs, successful business professionals, or high-net-worth individuals that invest their personal funds into promising startups. In addition to providing capital, Angel Investors often offer valuable expertise and mentorship to the companies that they invest in.
3. ACCELERATORS
Accelerators are organizations that support early stage companies through a competitive formal mentoring program. Companies that are accepted will typically give up a small portion of equity in their company to be able to participate in a 12-16-week long program, gaining exclusive access to guidance from experienced mentors, incredible business connections, and pre-seed or seed funding.
4. SBIR GRANTS
Small Business Innovation Research (SBIR) grants are competitive funding opportunities provided by federal government agencies to support the research and development (R&D) projects of small businesses. Early stage companies in particular can benefit from SBIR grants as they may accelerate R&D efforts, help explore innovative ideas, and demonstrate proof of concept.
5. EQUITY CROWDFUNDING
Equity Crowdfunding enables early stage companies to raise capital by soliciting small investors from a large number of investors through online platforms Crowdfunding not only gives companies access to capital but can also help gauge business interest.
6. CORPORATE VENTURE CAPITAL (CVC)
Occasionally, a existing business will make a strategic SEED stage investment, in an early stage startup company. These investment opportunities generally arise where there is a strategic fit between the company raising funds and the underlying business of the CVC.
7. CUSTOMER FINANCING
Sometimes referred to as pre-sale financing, customer financing is when a company collects payments from customers upfront before delivering goods or services. Early stage companies can use this pre-sale revenue to fund production and development while also validating a market demand with reduced financial risk.
8. CREDIT LINES
Early stage companies can apply to and take advantage of credit lines as a financial tool that provides flexible access to funds up to a set limit. Unlike traditional loans, credit lines allow businesses to borrow as needed, repay, and borrow again. For early stage companies, this can be ideal for managing cash flow, covering short-term expenses, and pursuing growth opportunities without having to issue equity.
9. REVENUE-BASED FINANCING
Revenue-based financing (RBF) is a special form of financing where businesses receive upfront capital and repay it through a fixed percentage of their monthly revenue until they reach a predetermined amount. RBF is particularly appealing to early stage companies because the repayment amounts adjusts according to performance, providing flexibility that helps alleviate financial pressure during low-income phases. Examples of RBF investors include specialized RBF funds, angel investors, alternative lenders, and government programs.
10. FACTORING THROUGH RECEIVABLES
Factoring through receivables is a financing method where early stage companies sell their accounts receivables to a third-party at a discount in exchange for upfront capital. This allows startups to quickly access funds tied up in outstanding payments that may help support daily operations, development strategies, or other types of expenses without incurring additional debt or further equity financing.
CHAPTER 2: FUNDRAISING IN BRIEF: YOUR SEED TO SERIES A ROADMAP
Along the startup journey from seed fundraising to a Series A round, there are many legal “steps” that entrepreneurs must properly execute to prepare for a successful Series A round. Our Seed to Series A Roadmap was designed to provide an overview of the entire process, so you can anticipate and avoid the common pitfalls you’re likely to encounter along the way.
Want to delve a little deeper? Check out our on-demand course at StartUp U: Your Seed to Series A Roadmap.
CHAPTER 3: ARE YOU INVESTOR READY? A CHECKLIST FOR FOUNDERS
So you’ve finally identified one or more promising potential investors. But what comes next? Are you and your team prepared to make a strong, compelling pitch? Are you truly “investor ready”?
My NEXT Raise is the only platform that provides, in one place, the tools startups need to increase their potential to lock in a successful raise at a fraction of the cost. Our game-changing platform supports and empowers you to be investor ready from day one, enhanced by our growing list of tools and resources:
- AI powered Data Room
- Founder Roadmap
- Cap Table Dilution Modeler
- Runway Calculator
- Brand & Pitch Deck Creator
- Financial Dashboard and more!
BECOMING INVESTOR READY
To capture investors’ attention and secure their investment, it is crucial to present a strong and compelling profile of your business. This entails showcasing the unique features of your products, providing a clear financial statement, highlighting effective business management, emphasizing the expertise and passion of your skilled team members, and demonstrating your business’s position in the market.
Additionally, it is essential to ensure that your pitch deck reflects the exceptional quality of your business, both in terms of content and presentation. A professional and well-crafted pitch deck speaks volumes about you as a founder or team and showcases the thoughtfulness and effort you have invested in your venture.
Shore up Your Legal Foundation
No matter how disruptive, groundbreaking or promising a new product or service, any potential investor will both identify and go to great lengths to avoid any glaring red flags. That means your company’s corporate documents — covering its formation, trademark protection, the election of its board of directors and officers and the issuance of founder’s stock — need to be in good order. Before they sign on the dotted line, an investor expects a complete list of all stakeholders in the company alongside proof of compliance with federal and state regulations.
Juggling these high-stakes obligations is undoubtedly overwhelming. As many capable leaders learn throughout their careers, knowing when to seek guidance can make all the difference. Don’t hesitate to seek legal counsel to check each of these boxes.
Build Your Company’s Financial Model
Include a projected income statement for roughly three to five years. A successful model demonstrates you understand your market and how the business scales, which is then reflected through the different assumptions you use to build the model. Although investors appreciate the challenge of accurately projecting total revenue each year, expect that your model, particularly for the next 12 months, will accurately identify your costs.
As a founder, you’re responsible for never losing sight of your “runway” — how long before you run out of cash. You calculate this by dividing your cash on hand by your monthly burn rate. Your model should reflect a runway that is long enough to get you to your next round of financing or break even under a more conservative set of revenue assumptions. For example, does the business have enough runway, even if you only achieve half of your expected revenue?
Be in the right room with the right investors
Regardless of a founder’s preparedness, if a healthcare company pitches to a fintech investor or a seed-stage startup pitches to a late-stage funder, the founder most likely will not make it out of the room with that investor. While seemingly obvious, too many ignore the reality that securing the investment largely revolves around choosing the right potential investors.
Use available resources to ensure your effort is intentional and targeted. Lean on your advisors — your attorneys, accountants, bankers, etc. — and research platforms. Take the time necessary to explore an investor’s portfolio, the companies in which they’ve invested, these companies’ stages, the industry categorizations and geography to really hone in on your ideal audience.
CHAPTER 4: CHOOSING A CORPORATE STRUCTURE: WHICH IS RIGHT FOR YOUR STARTUP?
WHY DELAWARE?
Delaware is informally known as the “Corporation State” due to its steady rise to leadership in public company incorporation since the late 19th Century when its corporate law was modified to be more business-friendly. Today, companies turn to Delaware for its “consistency, predictability, stability and quality” within the business world. See Delaware Corporate Law Facts and Myths.
What’s the difference between a C-Corporation and an LLC?
The designation “C-Corporation” refers to a company’s tax status. C-Corporations are taxed on their income at the corporate level at the corporate income tax rate, and shareholders are taxed on distributions at their personal income tax rate. While some businesses are leery of this “double taxation,” the recent lowering of the corporate tax rate has made C-Corporations a more favorable tax choice for businesses.
Should I form my business as a C-Corporation or LLC?
When choosing an entity structure, it is important to remember that the business is not married to that structure. As the needs and direction of your business change, so too can its entity structure. Indeed, making changes can streamline operations, investment, and growth. Here are some questions to consider when deciding on an entity structure:
- Has your business existed for multiple years?
- Are you looking to grow your business, such as through accepting more investments or becoming a publicly traded company?
- Do you plan to raise capital from institutional investors such as VCs?
- Are you planning to hire employees? Will those employees be offered incentive plans?
- Are you planning to hold your shares for at least 5 years before the sale of the company?
If your answers to these questions are yes, then incorporation as a Delaware Corporation might be right for you.
CONVERSION OF YOUR LLC TO A DELAWARE C-CORP
An initial choice of LLC structure for a business may be appropriate at the time of formation but, as the business grows, a corporation structure may better serve the needs and goals of the company. Many businesses elect to incorporate in Delaware, even if their principal place of business is in another state. Delaware’s corporate law is focused on the corporation’s internal business operations, and Delaware’s corporate judicial decisions are seen as largely predictable and dependable. Additionally, many venture capitalists prefer to invest in Delaware corporations. For more details on Delaware C-Corporations, check out What are the Benefits of a Delaware C-Corp? Choosing the Right Entity Structure.
CHAPTER 5: WHEN AND WHY DO YOU NEED A 409A VALUATION?
Over the past few years, granting stock options has become an important aspect of employees’ compensation and also an important tool in assisting employers to attract and retain talented employees (and/or contractors). Compensation via stock options is defined as deferred compensation. Deferred compensation plans can be qualifying or non-qualifying, with 409A plans being non-qualified. Internal Revenue Section 409A was passed as part of the 2004 American Jobs Creation Act, and on April 10, 2007, the Treasury Department and the IRS issued regulations on the treatment of non-qualified deferred compensation plans under Section 409A. All non-qualified plans must comply with Section 409A rules or risk losing the tax-deferred status of the plan and subject participants to having all previous plan deferrals declared immediately taxable at a participant’s regular tax rate plus a 20% penalty tax.
In order for the options recipients to be able to defer the tax on their compensation, the exercise price of the option (also referred to as the strike price or the price at which an underlying security can be purchased or sold when trading a call or put option, respectively) cannot be lower than the fair market value of the underlying security as of the grant date. For a privately-held company, the 409A valuation is the most common approach to achieving Section 409A “safe harbor” status. The IRS does not have mandatory certifications for an appraiser to perform a 409A valuation, but it does require that the appraiser have “significant knowledge, experience, education and training.”
CHAPTER 6: ALL ABOUT EQUITY
EQUITY BASICS FOR ENTREPRENEURS: WEBINAR?
When an individual or entity invests in a startup, they typically do so in return for an ownership stake in the company, otherwise known as equity. For an overview of the basics, be sure to check out our free webinar led by NEXT partner Carl Grant:THE ABC’S OF EQUITY CROWDFUNDING
In 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act). Title III (Regulation Crowdfunding or Reg CF) allowed smaller companies to crowdfund investments online from many smaller investors. Reg CF allowed everyone into the world of private-company investment—companies not registered or trading shares on national exchanges. Previously, the Securities and Exchange Commission (SEC) allowed only “accredited investors,” those meeting certain wealth or income thresholds, to invest in private companies. The SEC finalized the Reg CF rules in May 2016.
EQUITY CROWDFUNDING EQUALIZES ACCESS TO STARTUP CAPITAL
In less than a decade, equity crowdfunding (Reg CF) has grown from curiosity to a major force in equalizing access to startup capital. Now early or mid-stage companies seeking investment can use the power of the internet and their existing networks to raise capital and, as important, awareness. And it’s only the start!
Reg CF Basics
- Companies (issuers) can raise up to $1.07m over a 12-month period by selling different types of securities that represent ownership, future ownership, or debt obligations.
- Issuers set minimum and maximum ranges for the overall raise and individual investment minimums. Further, SEC regulations limit maximum individual investment through an income/net-worth formula. Issuers must file CPA-reviewed financial statements and a legal document (Form C) with the SEC,
which contains certain disclosures about the company. They also must file at least one year-end report. - Issuers sell their securities over a FINRA-approved intermediary (portal). There are currently around 55 portals. The biggest ones have lists that contain hundreds of thousands of potential investors, along with media and industry insiders.
- Securities sold pursuant to Reg CF are restricted, meaning investors must generally hold them for one year before selling them, with exceptions.
WHAT EQUITY CROWDFUNDING CAN DO FOR YOUR BUSINESS
Besides capital to help your business grow, Reg CF provides other benefits unique to this model.
- Broaden your investor base
- Turn your customers into marketers
- Incentivize your investors
- Prove value to institutional investors
CONVERTIBLE NOTES VS SAFE
“Debt or equity?” That is the question many early-stage founders face when raising capital. While SAFEs[1] may be the instrument of choice for many early-stage companies today, some investors still prefer a traditional convertible note.
How do these two vehicles differ? Let’s take a closer look!
WHAT IS A CONVERTIBLE NOTE?
A convertible note is a debt instrument that needs to be repaid—typically through cash or shares of a company. Convertible notes are a way for seed investors to invest in a company, usually startups, that are not ready to place a valuation on the company. Or to define in lay terms, a convertible note is a type of debt that converts into equity when a startup reaches an agreed-upon milestone. This milestone is usually the company’s next equity financing (e.g., priced funding round).
Convertible notes have a maturity date. A maturity date is the date certain that the convertible note must be repaid. Convertible notes are structured similar to a loan, with the exception that they typically automatically convert into shares of stock upon a specified event, alleviating the need to repay the underlying cash amount.
Convertible notes help a company by providing a capital foundation prior to a company valuation and raising a priced funding round. Not only do these notes help startups focus on growing their business without having to pay debts immediately, but they are also a fast way to raise money. There is also a benefit to investors. One such mutual benefit is that it does not force an investor or startup to determine the value of the company when there might not be muchdata on which to prepare a valuation.
In addition to the maturity date, important terms of a convertible note include the valuation cap, discount rate, and interest rate. An investor usually gets the benefit of the valuation cap or the discount rate, or both, plus the interest rate at conversion. The valuation cap is a mechanism that caps the maximum company value at which a convertible note converts into equity.[2] On the other hand, the discount rate is a discount to the valuation the company receives in its priced financing round that allows an investor to purchase the equity securities at a price below that paid by the equity investors. The discount rate offers downside protection in the event the valuation in the priced offering is lower than the valuation cap in the convertible note. Finally, similar to a traditional loan agreement, convertible notes accrue interest at a pre-determined interest rate that, which will then increase the number of shares issued to an investor at conversion.
Overall, convertible notes are a great option for startups that can benefit from seed funding and do not otherwise have access to equity or traditional debt funding. They are also simple in structure which makes them an efficient way to raise funds. Financing with convertible notes is generally faster and less expensive in comparison to other measures that might require more comprehensive documentation.
WHAT IS A SAFE?
Similar to a Convertible Note, a SAFE converts into equity upon a specified future event— that “specified future event” is typically a company’s Next Equity Financing[1]. However, unlike a Convertible Note, a SAFE generally is not considered debt, which means it does not have an interest rate and a set maturity (or expiration) date. This allows an early-stage company the flexibility of raising capital via a convertible instrument without the looming deadline of a specified maturity date. SAFE holders can best be described as early investors in a future priced round.
Inevitably, the next question will be: “What are the key terms of a SAFE?”
The two most important terms of a SAFE are the Valuation Cap[2] and the Discount[3]. Either the Valuation Cap or the Discount will be used to determine the price per share a SAFE converts at—in most cases—upon the happening of the Next Equity Financing. At the time of the Next Equity Financing, the company will calculate the conversion price per share of the SAFE using the Valuation Cap and the Discount. The calculation that produces the lowest price per share upon conversion will be utilized. More often than not, the SAFE’s Valuation Cap will be applied if a company continues to grow and rapidly increase in value. Nevertheless, the Discount provides downside protection to a SAFE investor in the event the valuation of the company’s Next Equity Financing is less (or marginally higher) than the Valuation Cap of the SAFE.
The Company—albeit with investor influence—must determine what percentage and amount to set the Discount and Valuation Cap at, respectively. The industry standard Discount continues to be twenty percent (20%), with upward or downward adjustment in exceptional cases. Although the Discount can be anchored to an industry standard with ease, the Valuation Cap cannot. A Valuation Cap is a forward-looking, arbitrary amount set by the company based on numerous factors including, but not limited to, the (1) experience of the founding team, (2) market size and potential, (3) proof of product, (4) previously completed financings, and (5) expected violation at projected time of a priced round, among others. On one hand, setting the Valuation Cap too low may cause a company to undervalue itself and sell too much, while on the other, setting the Valuation Cap too high may drive off investors. A good rule of thumb is to look to sell between fifteen and twenty-five percent (15-25%) of your company in each financing round.[4]
Admittedly, any stage of capital raising can be perplexing and undoubtedly involves more considerations than any brief overview can provide, from setting a proper valuation cap to compliance with securities laws. As such, competent counsel should always be consulted before conducting a SAFE offering.
WHAT IS SERIES SEED PREFERRED FINANCING?
Series Seed Preferred financing is a funding round typically undertaken by early stage companies, occurring after initial seed funding and before more substantial rounds like Series A. Investors in a Series Seed Preferred financing are often angel investors, early stage venture capital firms, or specialized seed-stage funds. They provide capital to the company in exchange for preferred stock, which offers several advantages over common stock.
Series Seed Preferred stock typically includes a liquidation preference, giving holders priority in asset claims if the company is sold or liquidated. Holders also benefit from conversion rights, allowing them to convert preferred shares into common stock under specific conditions, potentially benefiting from future company growth. Moreover, Series Seed Preferred shareholders usually have voting rights on important company decisions, influencing company management. Some Series Seed Preferred stock may include preemptive rights, providing investors an opportunity to invest in future rounds so as to maintain their percentage of ownership if the company issues additional shares, and anti-dilution provisions, protecting investors if those additional shares are issued at a lower valuation than the Series Seed Preferred.
Several key documents are involved in outlining the terms, rights, and obligations of the early stage company and the investors in a Series Seed Preferred financing. The Certificate of Incorporation outlines the structure and governance of the company, including provisions for preferred stock issued. The Stock Purchase Agreement formalizes specific investment terms, such as the, share price, and contains various representations and warranties about the company. The Investors Rights Agreement specifies investor rights, including information rights, registration rights, and sometimes governance rights. A Voting Agreement details the voting rights and processes for Series Seed Preferred shareholders often including the right of the Series Seed Preferred Investors to appoint a Board Member. Additionally, a Right of First Refusal (ROFR) and Co-Sale Agreement are typically included to grant shareholders rights to purchase shares sold by the founders, or to tag-along in those sales under the same terms.
Overall, Series Seed Preferred financing provides investors advantageous terms and downside protection while offering companies valuable access to capital for business expansion. If considering this type of financing round, it is critical to consult competent counsel to ensure all legal considerations are properly addressed.
REGULATORY COMPLIANCE
Whenever you raise a round of financing, whether a SAFE, Convertible Note or Priced Preferred (or Common) Stock round of financing, one of three things happen from a regulatory perspective:
You file a full “Registration Statement” with the Securities and Exchange Commission.
Similar to an IPO filing – very expensive and time consuming.
You qualify for an exemption to avoid filing a Registration Statement.
For example – You are exempt and file under 506(b) or 506(c) of Regulation D (“Reg. D”) of the Securities Act of 1933, as amended.
If you do not file a Registration Statement or qualify for an exemption such as 506(b) or (c) under Reg D., and are not otherwise exempt under Section 4(a)(2), YOU HAVE VIOLATED THE SECURITIES LAWS.
FEDERAL SECURITIES REGULATIONS
The Securities and Exchange Commission (SEC) is a federal agency tasked with administer the Securities Act of 1933, as amended (along with others).
The Securities Act of 1933, as amended is also known as the Securities Act or ’33 Act.
Whether your offering of securities is exempt, you often will need to file a “Form” with the SEC to perfect the exemption.
Careful attention must be given to selecting the correct form and properly completing it.
All forms are filed with “EDGAR”, the SEC’s Electronic Data Gathering, Analysis, and Retrieval System.
More information on the SEC can be found here: https://www.sec.gov/
WHAT IS A SAFE?
State-level securities statutes and regulations are commonly referred to as “Blue Sky laws.”
The Blue Sky Laws of each state are different, and generally require some action be taken at the state level to prefect your exemption..
Blue Sky issues relating to securities offerings arise primarily in three areas:
1. Securities exemptions and filing requirements.
2. Antifraud liability that may arise from a securities offering.
3. Licensing and registration requirements for securities industry personnel participating in a securities offering.
SEEK LEGAL COUNSEL ON REGULATORY COMPLIANCE WHENEVER YOU RAISE FUNDING!
Chapter 7: Operating a Successful Startup
Bringing on external team members for the first time is a tremendous milestone in a young company’s life and plays a huge role in the business’s initial trajectory. At this point, founders must answer four essential questions related to team building:
1) Am I picking candidates who are a good fit for the business?
2) Am I appropriately classifying these individuals?
3) How will I reward and compensate them?
4) How do I protect my intellectual property if a team member leaves?
Understanding how to clearly and intentionally answer these four questions as founders may be the difference between those who build successful companies in their respective industries and those who fall into the five-year failure bucket.
AM I PICKING THE RIGHT INDIVIDUAL?
As founders establish a team, they must pay attention to the ways in which each individual complements the others. Single founders, in particular, are bound to have blind spots, so practicing self-awareness and filling early positions with individuals whose strengths complement the founder’s vulnerabilities will be key.
Building a business is a 24/7 endeavor, one in which founders will be surrounded by the individuals whom they select to stand by their side. It is critical, therefore, make the most of the opportunity when building a team from scratch and prioritize those people who align with a founder’s vision, work ethic, commitment, and the speed at which they plan to grow the business.
HOW AM I CLASSIFYING EACH TEAM MEMBER?
The very first thing to think about while onboarding a new member of the team is whether they are an independent contractor or an employee. Each role offers a set of advantages and limitations that are important to understand. While founders will have more control over employees, founders typically default to an independent contractor classification because it avoids the challenges of compliance with withholding tax and other legal formalities.
What many might not realize is that regardless of how a founder classifies a new team member, the various federal agencies, as well as every state, have varying regulations that determine the legally correct classification. To ensure each hire is onboarded appropriately, founders must follow the relevant guidelines, as well as connect with an employment attorney to ensure compliance.
HOW WILL I COMPENSATE EACH TEAM MEMBER?
Beyond traditional compensation methods, startups frequently offer employees stock options or common stock in the business. When offering equity, there are three crucial questions to answer: how much do I grant, should the equity grant vest over time, and if so over what is the appropriate vesting period?
The size of the equity award is driven by several factors that include the amount of cash compensation, the experience level of the employee, how critical the role is to the continued success of the company, and the stage of the company. For example, a senior-level employee integral to the company’s success, who is paid below-market cash compensation during the risky startup stage of a company, would require a larger equity grant than a similar individual being paid a higher salary or joining the company at a later stage.
Most commonly, founders will offer four-year vesting with a one-year cliff. In other words, the individual must remain with the company for at least one year to vest 25% of the award, and the rest is vested monthly over the next three years. Not only is this the market standard for venture-backed companies, but it gives the employees or contractors the incentive to stay and help build the company for at least four years.
Without vesting, a new team member could leave the business after a few weeks or months with their full equity award – a less than ideal outcome for remaining founders and other team members who together will be working 24/7 for the next five-plus years building the business.
Additionally, any time a startup completes a new round of funding, investors typically like to see 10 to 12 percent of unallocated stock options in the pool for future employees, which serves as a pool for the next stage of growth.
HOW CAN I PROTECT THE BUSINESS’ INTELLECTUAL PROPERTY?
Another critical element in onboarding an employee or consultant is a PIIAA – a Proprietary Information and Inventions Assignment Agreement. This agreement helps ensure that all confidential information will be kept confidential, and that the work the new team member does for the company as a consultant or an employee belongs to the company and not the individual.
Most early-stage startups are not aware of this step, which may create a problem for the startup when seeking venture capital funding, as founders will likely be faced with this question during due diligence. From an investor’s perspective, if there is a departed co-founder or early employee who may in the future challenge the ownership of intellectual property, that presents a risk that may impact an investor’s decision on whether to invest.
CHAPTER 8: LEGAL GUIDANCE IS THE KEY TO ANY STARTUP’S SUCCESS
From choosing your business structure and the selection of co-founders to recruiting and hiring employees raising funds and protecting your intellectual property, there are countless decisions to make and steps to take to help you de-risk and grow your company from the ground up.
Imagine having to rely solely on WebMD as a diagnostic and prescriptive tool any time you experience a health concern, as opposed to speaking directly with a doctor. The same can be said for attempting to establish a new business venture without any direct legal counsel. It makes a world of difference to have an experienced professional who can provide invaluable guidance to you on each step of this journey. It may also save you tremendous time and money as you eliminate the likelihood of having to react quickly and course-correct down the road.
NEXT powered by Shulman Rogers is dedicated to empowering startup success, and has been recognized by LegalWeek (the largest legal publisher) as the best law firm in the United States for enabling Startup Success. To learn how our team can help you achieve your goals, reach out today to schedule your free consultation.
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