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Forming a start-up results in many upfront costs. Some basic needs of a growing business are supplies and equipment, consultative services, advertising, and – of course –employee salaries. The paradox of starting a business is that it costs money before it even starts making money. This is why getting fundraising capital, or seed capital, for your business at the beginning stage is so important. Finding a great startup attorney will not only help you prepare investment request documents, but their legal advice can also guide you on what the investment will do for your business and help build credibility.
Seed capital means an initial investment to help get the business up and running. For most start-ups this will come from the founder’s own personal assets and any additional investments from friends or family members. There may be some form of an agreement with the initial backers to provide a return on investment. Getting seed capital and demonstrating a track record of success with seed capital will be critical in getting funding later on by venture capitalists.
Even if seed capital does not carry a legal agreement between initial investors, a business will be viewed more favorably if they show good faith to their original backers. The type of arrangement a founder makes with original investors will speak volumes to larger investors down the road. Therefore, even if it seems like a formal agreement between friends and family is not necessary, it is still encouraged to prepare certain legal documents to get more “official” funding.
Convertible Term Sheet: Convertible term sheets are usually the best option for companies that are requesting an early level investment of under $1 million. Key items for a convertible term sheet are the investment amount, interest rate, maturity date, optional conversion upon maturity, and price limit.
Simple Agreement for Future Equity: This is sometimes referred to as a SAFE agreement. This type of agreement states that investors will have shares in the company in the future. This option is great for start-ups that are pre-revenue and also offers simplicity. The SAFE agreement does not require a valuation, a price of shares, or a date of maturity. SAFE agreements also offer an option to discount prices for early investors.
Keep It Simple Security: This form is referred to as a KISS agreement. The KISS form is just like it sounds, to keep investment options short and simple. A KISS agreement offers an option for a debt version and an equity version. The debt version gains interest with a maturity date of 18 months and converts into stock if the company reaches $1 million for the next level of funding. The equity version also offers an 18-month date of maturity and converts into equity if the next level of funding reaches $1 million. So the debt version converts into stock and the equity version converts into equity. A significant advantage to this is that there is no level of interest in a KISS agreement.
Promissory Note: A promissory note explicitly states the terms in which a founder plans to offer a return on the investment. This note will also indicate the amount and the date upon which payment will be returned.
Getting start-up help is critical to the success of your business. Running a business is stressful enough, let us help you. Expert legal advice can offer credibility to your business and help set the stage for more substantial investments in the future. With business needs changing each day, it is essential to have a legal consultant on your side. More than just document preparation, Bridgewater Law Group can help your business succeed through many means.
We can offer you a free consultation and tell you our assessment, to advise you on the best options for your business. Our consultants are standing by 24 hours a day, seven days a week, to advise you on the potential of your case. Your business needs deserve the best chance to thrive, so give us a call today.
