Legal Aspects of Fundraising

When you raise funds for your startup, you need to understand the legal aspects to protect your business, your investors, and yourself.

Let’s break down some of the key concepts you need to know.

Shareholder Agreements

A shareholder agreement is a legally binding document that outlines the rights and obligations of the company’s shareholders (including you and your investors).

This agreement usually covers things like:

Voting rights – define how decisions will be made within the company and who has the authority to make those decisions.
Dividends – how profits will be distributed among shareholders.
Transfer of shares – controls what happens if a shareholder wants to sell their shares. Often, there are rules in place to ensure shares are offered to other shareholders first (called “right of first refusal”).
Exit strategies – define what happens in the case of an acquisition, IPO, or if a shareholder leaves the company.

With a solid shareholder agreement, all parties involved are protected. This helps avoid future disputes and set clear expectations from the start.

We Transform Your Ideas Into Scalable SAAS Solutions

Talk to us

Equity Dilution

Equity dilution occurs when the company issues new shares, reducing the percentage of ownership of existing shareholders.

When you raise funds, you’ll likely issue new shares to investors, so your percentage of ownership goes down.

For example, if you own 100% of the company and issue shares to an investor who then owns 20%, you now own 80%.

Although you own a smaller piece, the idea is that with the new investment, the company (and your smaller piece) will grow.

Founders sometimes negotiate anti-dilution clauses in fundraising rounds to protect early investors by giving them more shares if the company’s valuation drops in future rounds.