Venture capital (VC) involves the financing of early stage startup companies with a considerable potential for growth. There are many legal aspects surrounding venture capital funding. These aspects include: equity sales, mergers & acquisitions, licensing matters, investor rights agreements, series A/seed rounds, contracts, and more. A business/venture capital lawyer assists with the legal aspects involved in the funding of early stage startup businesses.
The Hoeg Law Firm has more than a decade of experience working on both sides of venture capital transactions. We have the knowledge and experience to assist both entrepreneurs and venture capitalists with the legal side of their business investment opportunities.
Aspects Involved in Venture Capital
Stock Purchase Agreements – Stock purchase agreements specify the agreement between the purchaser and seller of shares in a company. In essence this contract protects 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 – Term Sheets are the roadmap to the 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 not (generally) binding, deviation from them in the course of drafting definitive documents will extract a toll in negotiations.
Transaction Diligence – Hoeg Law helps clients with the process of transaction due diligence in M&A deals. This includes parties on either the buying or selling side of the deal. Transaction diligence involves the investigation and verification of an investment opportunity. When purchasing a business/making an investment, it’s important to first gather information and verify details for a multitude of reasons. Simply put, transactions that go through a due diligence process 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. On the other hand, 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. Hoeg Law helps Michigan business owners ensure they’re compliant with these laws.
Charter Restatements – A charter is a legal document that is filed with the 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. For example, the majority of the entire board of directors must approve any restatement of charter. Also, outstanding stock shares must be considered before changing any charter. Thus, companies should obtain sound legal advice before changing any corporate charter.
Rights of First Refusal and Co-Sale – Right of First Refusal and Co-Sale is an agreement often requested by investors. This legal document places limitations on current shareholders and company founders. The agreement details information regarding future stock transactions. The agreement must comply with state laws and regulations. So, a competent business law attorney’s guidance becomes vital when writing this agreement.
Board Observation Letters – Board Observation Rights Letters are legal documents requested by investors. These signed documents give investors rights listed in the letter. Often investors desire attendance at board meetings, access to a company’s books and records, and consultation with company management at regular intervals. Of course any company has a legal right to protect proprietary information. So, it’s extremely important to draft a well thought out Board Observation Letter that protects the company while providing transparency to investors. Consequently, an attorney must write this letter and all parties will sign the document.
Founder Agreements – A Founder Agreement 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, deciding how equity will be distributed among the owners can be established as well as stock distribution. Salary, compensation, and exit clauses may also be included in a Founder Agreement.
Another major consideration is intellectual property. Most companies insist that anything created during work hours belongs to the company. So, this area may also be a part of a Founder Agreement. Basically, a Founder Agreement is designed to protect the owners of the company. Consequently, taking time to meet with an attorney and establish this legal document prevents future problems.
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’ve got 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