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Venture Capital

Venture Capital Lawyer in Michigan

Venture capital (VC) funding is vital to the success of many startup companies in their early stages, especially those with the potential for considerable growth. This type of funding involves many legal aspects that need to be considered before entering into any legally binding agreements. These include things such as equity sales, mergers & acquisitions, licensing matters, investor rights agreements, series A/seed rounds, and contracts. These are often complex matters that require expertise to navigate.

Due to this complicated nature of venture capital funding, working with experienced legal counsel is critically important to the success of any venture capital financing arrangement. The Hoeg Law Firm has more than a decade of knowledge and experience working on both sides of venture capital transactions and assisting both entrepreneurs and venture capitalists with the legal side of their business investment opportunities. If you are in need of legal counsel regarding venture capital arrangements for your business, contact us today to get started.

Aspects Involved in Venture Capital

Stock Purchase Agreements – These specify the agreement between the purchaser and seller of shares in a company. The purpose of this contract is to protect both sides of the agreement.

Investor Rights Agreements (IRA) – An IRA is a standard legal document between a venture capitalist (investor) and other entities involved in the financing of a startup company. These documents generally include liquidity of stock, investor rights, right of first refusal, etc.

Voting Agreements – As part of any kind of funding round, the company and the investors together are going to want to “lock in” the governance structure of the company that had been agreed to as part of the round. Part of this “lock in” is described in a Voting Agreement which will set forth, among other things, the initial organization of the corporation’s board of directors (or board of managers), which class, series, or individual investor gets designation rights in respect of the board, and any drag along provisions (provisions that require minority equity holders to go along with significant corporate acts) that might apply.

Series Term Sheets – These are essentially the roadmap to VC funding and the very first document that will be negotiated and finalized. They set forth all of the material terms of the funding, from economics to governance, and while they are generally non-binding, deviation from them in the course of drafting definitive documents will extract a toll in negotiations.

Physical copy of a report titled "Michigan venture capital annual research report" with the mitten shaped state in the background and the subtitle text "growing a business in Michigan."

Transaction Diligence – This involves the investigation and verification of an investment opportunity. When a venture capitalist is providing funding for a business, it’s important for them to first gather information and verify details surrounding the transaction before moving forward. Transactions that go through a due diligence process generally yield a much higher chance of success.

Securities Law (Blue Sky) Compliance – Securities Law is enforced at the federal level in order to protect investors. In addition to this, each individual state has its own set of “Blue Sky” laws that are enforceable at the local/state level. In Michigan, these laws are referred to as the Michigan Uniform Securities Act. It is important for Michigan business owners to ensure they’re compliant with these laws.

Charter Restatements – A charter is a legal document that is filed with the Michigan Secretary of State. This document contains various details of a business and/or corporation. Details may include information regarding stock distribution, location of business headquarters, authorized receiver of legal documents regarding business transactions, etc. Basically, a corporate charter explains why a business exists and who controls operations.

When a business desires to restate a charter the process must follow numerous legal steps. The first major step is for the majority of the board of directors to approve any restatement of charter. Also, outstanding stock shares must be considered before changing any charter. While these are the main steps, there are other more detailed and specific steps a company must follow. Because of this, it is strongly advised for companies to obtain sound legal advice before changing any corporate charter.

Rights of First Refusal and Co-Sale – These are common agreements that are often requested by investors. The purpose of Rights of First Refusal (ROFR) and Co-Sale agreements are to place limitations on current shareholders and company founders. The agreement details information regarding future stock transactions and must comply with state laws and regulations.

Board Observation Letters – These letters are legal documents requested by investors. The purpose of these letters is to give investors certain rights surrounding the observation of the company they have provided funding to. Often investors desire attendance at board meetings, access to a company’s books and records, and consultation with company management at regular intervals. With that being said, any company has a legal right to protect proprietary information and therefore it’s extremely important that these letters are properly drafted and well thought out so they protect the company while providing transparency to investors.

Founder Agreements – This is a legal contract between two or more parties that own a business. The contract lists the roles and responsibilities of each owner. It’s important to establish who makes decisions regarding each area of the company. Otherwise, disagreements will arise as the business grows.

Financial considerations may also be included in a founder agreement. For example, these agreements can establish how equity will be distributed among the owners as well as other things such as stock distribution, salary, compensation, and exit clauses.

Another major consideration is intellectual property. Most companies insist that anything created during work hours belongs to the company. In many cases, this may also be a part of a founder agreement. Basically, a founder agreement is designed to protect the owners of the company.

Venture Capital for Entrepreneurs

The questions posed by pursuing venture capital investors can seem intimidating for an entrepreneur. While all of these questions are justifiably intimidating, we have the knowledge and experience to help you make the most of all your investment opportunities. Hoeg Law assists entrepreneurs involved with VC transactions in a variety of ways including:

  • Determining whether the sale of business equity or debt is necessary
  • Terms and conditions for the sale of equity or debt
  • Whether or not to delegate voting control
  • The amount of voting control to delegate
  • Liquidation or dividend preferences for investors
  • Helping determine the board of directors

Venture Capital for Investors

On the investment side, the venture capitalist also faces many questions. Whether you’re seeking institutional investment or looking to raise and operate a fund yourself, Hoeg Law has years of experience working on both sides of venture capital transactions. We help venture capitalists in several ways including:

  • Determining how much control of the company they should obtain
  • Structuring funds and governance documents
  • Providing insight on whether they should sit on the board or merely take an observational role
  • Determining whether the investment should involve equity or debt
  • Structuring terms involved with the sale of equity or debt
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