Legal deep dive for founders - Anthony Rose at Slush 2021
Watch our founder and CEO Anthony Rose on stage at Slush 2021, as part of the Builders' Studio series. In 26 minutes, A...
Raising startup funding used to be a slow and expensive process. It involved all kinds of stress from deciding how much to raise to rounding up enough investors to reach your funding target and then getting each of them to sign the legal docs involved.
But now, we’ve gotten rid of the stress, expense, and tediousness of traditional funding rounds. Startups can finally take investment anytime, in just a few clicks.
12–18 month investment cycles can now be replaced with continuous investment. Instead of having to raise enough money to last a year or more and round up a group of investors to get together at the same time, you can top up on demand.
With Instant Investment, when a potential investor says ‘Hey I love what your team is doing, can I invest $10K?’, you can now say, ‘brilliant, what’s your email? I’ll send you a link to my deck and deal docs. If you like what you see just click to e-sign and wire the money’. The investor will instantly get a share certificate to confirm their investment
The traditional fundraising process is complex and expensive, which is why we created a simpler solution.
Usually, a funding cycle lasts 12-18 months. That is, your goal is to raise enough money to last 12–18 months. That time frame generally looks something like this:
It’s a tiresome repetition of find investment, grow, find-investment-or-bust. It can be extremely stressful and inefficient.
From a VC’s point of view, those 12–18 month cycles are convenient. VCs play the numbers game, investing in dozens of startups. Some will scale, others will die. VCs are overwhelmed with investment requests, and the 12–18 month ‘grow or die’ cycle forces those requests into a form that allows them to categorise rounds, traction and valuation as Angel, Seed, Series A, etc.
You raise money based on promises you make (technical delivery, traction, revenue), and hitting those milestones is key to raising another round.
VCs see the labourious 12–18 month cycle as a way of weeding out the weak — i.e. the failure of a company to round up the full complement of investors for their next round is a good indicator that the company isn’t going to be the next unicorn, and so imposing this regime is a good indicator of success.
When you do a funding round, the company and the investors sign and adopt funding round agreements (which typically comprise a Shareholders Agreement and a new set of constitutional documents) which contain terms that prevent the company from issuing more shares without the investors’ consent. The reason for this is that investors fear(other than the company going out of business) that the founders will create zero-cost or heavily discounted shares, for themselves or friends, thereby diluting the investor’s stake in the company.
To prevent this, provisions found in funding round agreements usually require shareholder consent to issue more shares, and also to give investors the right to buy any newly-issued shares to maintain their existing stake in the company.
Founders are thus prevented from taking an investment from, for example, a person they meet at an event, as they don’t have the power to issue shares for that new investment.
Doing all the paperwork for a funding round is, or at least was, a hugely time-intensive process. Redlined Word docs circulated back and forth between the lawyers for each party as each party’s lawyer fiddles with the wording to insert clauses designed to protect their client’s interests. Or simply to change the wording to reflect their personal or house style, no matter whether those changes are beneficial or just drafting preferences that do not have any legal implication (e.g., “the title of this document should be Shareholders’ Agreement and not Shareholders Agreement”) . The small changes can run up legal costs with lawyers charging you in 6-minute increments.
So it’s no wonder that historically it made sense to group investments into a few big rounds rather than lots of little rounds.
The good news is technology is rapidly changing that. The decades-old lawyer-to-lawyer exchange of redlined Word docs is being disrupted by legaltech startups like SeedLegals.
Now it’s time for the next step.
Instant Investment changes everything. By building the ability to take additional investments into existing funding round deal documents, then using technology to automate the legals and company-investor communication for additional investment, you are now free to do a small initial funding round. You can raise only what you need or just the investment you’re able to get right now, and then top up anytime, within limits agreed in the initial funding round.
In the past, the transaction overhead would have been a nightmare due to needing lawyers to manually build each document for each micro-transaction, resulting in the norm 12-18 months traditional funding cycle. All this has now changed.
We are introducing a new age of ‘continuous funding’, augmenting and sitting alongside traditional funding rounds. Founders and investors finally have the flexibility to grow and scale their businesses, and to make investments on demand whenever they come across an interesting opportunity.
New to SeedLegals? Book a chat with one of our experts and we’ll help you get started with your Instant Investment in just a few minutes.
Use Instant Investment to top up a previous round and add new investors anywhere, anytime.Get started
*Disclaimer: The information contained in this article does not constitute and should not be treated as legal, tax, accounting, or financial advice.