In the past when you did a funding round, once the round was closed adding investment later meant doing another round. But that’s all changed, more than 70% of all investment raised on SeedLegals is now outside a funding round. We call it agile fundraising.

By enabling Instant Investment in your round we build the permission to issue more shares into your funding round documents so you can top up later, at the same time, or at a higher valuation, without needing your shareholders’ permission (although you may have to offer the shares to them first), making it easier to top up as you find additional investors.

What the data shows

Founders have enabled the Instant Investment / rolling close provision in around 75% of funding rounds, allowing them to top up later.

Instant Investment gets used a bit more in smaller rounds than larger ones which reflects, in part, that some founders are intentionally doing smaller funding rounds to raise sooner, and then including a large Instant Investment topup provision so they can ‘complete’ the round later.

What this means for you

Unless an investor pushes back on it, or you’re certain you don’t plan to raise again ahead of your next round, you may as well enable this in your round, there’s no cost or downside for doing so, and it could save you a lot of admin overhead later.

When you enable Instant Investment in your round, how much top up should you allow for?

What the data shows

The chart above shows just the most common amounts that are specified. It’s apparent that the larger the amount being raised, the larger the Instant Investment topup that founders want to include.

What this means for you

Setting the Instant Investment top-up amount to 30% of the round size looks to be a common pattern, allowing you to top up that amount more later with no additional permissions needed, at the same or higher valuation as the funding round.

Preemption gives shareholders the right to buy more shares later so that they can maintain their percent equity stake in the company.

Here, you’re specifying which shareholders will have a preemption right in future – you can choose whether it’s all shareholders, or only voting shareholders, or only the new investors in this round, or specific share classes.

What the data shows

The data shows that the most popular choice is that preemption is only offered to holders of voting shares. This matches the usual practice on crowdfunding platforms, the idea being that small investors get non-voting shares, and then you save yourself a lot of admin overhead later by only having to contact the smaller number of shareholders who have voting shares, to offer them their preemption right.

What this means for you

If you are planning on having lots of smaller investors with non-voting shares then our suggestion is to enable preemption for the holders of voting shares only, which will save admin overhead later.

Additionally, if you’re planning to create an EMI Option Scheme for employees, by only giving preemption to holders of voting shares and giving non-voting shares to your employees will help get a better EMI valuation discount for your employees’ share options.

Drag Along means that in the event of an offer to buy the company, if a majority of the shareholders want to go ahead then all shareholders are obliged to sell. If you don’t have this provision you can be stonewalled or blackmailed by a few holdout shareholders.

What the data shows

Drag Along is an incredibly important provision for founders to include in funding round documents. And, it’s also something that investors will generally insist on. So, with very few exceptions, Drag Along will almost always be enabled in a funding round – in fact the only reason we provide this question at all, is so founders and investors can see at a glance that Drag Along is enabled just by looking at the Key Terms selections.

What this means for you

If you’re planning on having many small shareholders with non-voting shares, then giving Drag Along rights to just the holders of voting shares saves needing to contact those smaller investors when a Drag Along vote is needed.

The Drag Along percent specifies the % of shareholders, by the number of (typically) voting shares held by them, that, were they to agree to a sale of the company (once there’s a potential buyer), could then force all shareholders to have to sell their shares.

Drag Along is therefore an extremely important provision to have – it avoids a few renegade shareholders blocking the sale of the company – but picking the right threshold is critical:

• Pick a threshold that’s too high and it may be difficult to reach the threshold and be able to sell the company,
• Pick a threshold that’s too low and the investors could force a sale of the company even if the founders don’t want to sell.

In early stage funding rounds the founders usually have 70% or more of the equity, so in these early days of the company there’s no chance of the investors being able to force a sale of the company, and the Drag Along discussion becomes whether the investors have any say at all in the sale of the company.

For example, if the founders have 75% of the shares, and the Drag Along percentage is set to 70%, that means the founders alone can force a sale of the company (notwithstanding any Investor Consent provisions). However, if the Drag Along percentage is 80%, the founders would require the consent of other shareholders, in addition to themselves.

But when a company gets to Series B or later, the tables are turned, and the founders may collectively have less than 50% of the equity. If the founders have less than 50% equity and the Drag Along percent is set to 50%, this means the investors can get together and force the founders to sell the business – perhaps to a buyer found by the investors, or even to one of the investors.

Note that in the discussion above we’re assuming that the founders are acting together… but that’s not always the case, founders often fall out, and then you may have scenarios where the investors side with one of the founders, against the other…

Note: we now recommend a Drag Along percentage of 50%, in line with the newer BVCA standard

What the data shows

The SeedLegals default used to be 75%, which is reflected in the table above. In 2023, the BVCA updated their model documents for early-stage investment, setting their recommended Drag Along percentage at 50%. We’ve now updated our advice to align the new BVCA standard of 50%.

What this means for you

We suggest picking a Drag Along percent that’s a little lower than the founders’ collective shareholding, so that the founders are able to negotiate a sale of the company, were they to find a buyer, and then force all the investors to sell too.

Occasionally there’ll be investors who ask for a higher Drag Along percent so that investors get a say on this, but we think those investor consents are dealt with in the Investor Consent provisions, and we would suggest showing investors that their protections exist there, not here (assuming that Investor Consent is enabled in your round).

Lastly, note that the Drag Along percent can be changed in your next round, so think about it as “what’s best between now and our next round”, rather than “what’s best forever”.

Tag Along means that if some shareholders want to sell their shares to a purchaser who is acquiring company, then all shareholders have the right to sell their shares on the same deal terms. This protects small shareholders from being taken advantage of by founders or larger investors colluding to sell the company, and so it’s a provision that all investors will usually be expecting to see.

What the data shows

Tag Along is almost universally enabled and, like Drag Along, really the only reason we make it an option on SeedLegals is so that founders and investors can see at a glance that this has been thought about and is enabled, simply by looking at the Key Terms summary.

What this means for you

With rare exception, you’ll want to enable Tag Along in your round.

A Co-Sale right means that if the founders (and in some cases shareholders too, see below) wish to sell their shares, other shareholders will have a right to sell a pro rata proportion of their own shares too.

The co-sale right exists to protect investors from the founders deciding to sell out of the business – the idea is that the investors invested in the founder, so the investors don’t want to be in the position that the founders cash out and the investors are left with a company, but without the founders who they invested in.

By giving investors the right to sell a proportion of their shares to match the % of shares that the founders sell, the co-sale right means that if the investors don’t have faith in the business as a result of the founders selling out, the investors can sell out a proportion of their shares too.

The side effect of the co-sale right is that it makes it harder for the founders to sell their shares – they can’t simply find a buyer and sell some shares to them, instead, having found a buyer, they now need to notify all shareholders of their intention to sell and allow the other shareholders to take up some of that offer… which can mean the founders are then able to sell fewer shares themselves to that buyer.

See SeedLegals lets founders sell some of their shares at any time, pay only 10% CGT

What the data shows

If the vast majority of cases Co-Sale rights are enabled in a round, reflecting the SeedLegals default.

What this means for you

Co-sale rights are an investor protection, it adds friction to founders sell their shares. So as a founder it’s tempting to want to turn off that feature. But, our recommendation is to leave it enabled, both because many investors will be looking for this protection.

By law, some company actions (like issuing new preferred shares) need shareholder approval – as in, approval by the majority of the shareholders.

In the early stages of a company the founders own the majority of the shares, so they could simply vote, by themselves, to do anything they want. To avoid that, the concept of Investor Consent (also known as Reserved Matters) was created so that some actions, separate from needing the approval of a shareholder majority, also need the consent of the investors (as in, excluding the founders).

Investor Consent is often one of the most difficult points in a funding round for founders to accept – it can create significant tensions between the founders and investors later on, with the potential for investors to prevent the company being sold later, or doing a new funding round at a valuation the investors don’t agree with, or entering new markets, or pivoting to a new product proposition.

In this question, you can choose whether Investor Consent will be needed at all, and if so, who will be included in the Investor Consent vote.

What the data shows

The data makes it clear that in early stage funding rounds, in the majority cases there is no investor consent. But when you get to Series A, it’s unlikely that your investors won’t insist on Investor Consent, and there’s little point trying to fight it.

After an early stage funding round the founders generally have free rein to run the company with little external control. But in later stage rounds investors usually ask for Investor Consent on the payment of dividends, changing the number of directors, etc., so they get a say on those matters.

One of the interesting nuances is, if there is investor consent, deciding which investors will get that consent – will it be just the investors in your latest funding round, or previous investors too?

There’s no obvious right or wrong answer to that, but in general you want to avoid later-stage VC investors stomping on the rights of earlier angel investors, without whom you’d never have gotten to this stage. So in general we’d recommend that Investor Consent includes all investors, not just the ones in your latest round.

However, if your last round raised £200K and your next round is raising £2M, your investors in the next round might argue that they alone should have the Investor Consent rights, as they put in 10X the amount of money as the previous investors.

An alternative to “new investors” vs. “new and existing investors” is giving the Investor Consent right to holders of a specific share class, and you can then allocate that share class to particular investors. For example, you might say that anyone who invests over £100K gets A Ordinary shares. Then, by giving Investor Consent to the A Ordinary shareholders, you’re only needing to get agreement from a few key investors later (which BTW may turn out to be less good because it concentrates power with them).

What this means for you

We think the above chart is one of the most helpful of all the SeedLegals Termometer data, helping both founders and investors understand what is market standard at different stage funding rounds.

The key take-away point is that if you’re raising £200K or thereabouts, you should push for no investor consent, noting that SEIS/EIS funds, VCs, and some angel investors may insist on it). However, if you’re raising a Series A round, it’s unlikely there won’t be an Investor Consent requirement.

If you have Investor Consent provisions in your round, then the next question is, what % (by number of voting shares held by the relevant investors) is needed to reach that investor consent majority?

What the data shows

The data makes it clear that that 50% is standard.

Just occasionally you may have investors asking for a larger majority being needed – in some cases that’s something to push back on, in other cases it might simply be a result of there being, say, 4 equal investors, and they deciding that the consent of any three of them is needed, and so they may propose, say, 65% as the Investor Majority percent.

What this means for you

We suggest staying with 50% unless there’s a good reason for something different.

More importantly, take care to avoid any one investor being able to block consent matters, unless of course there is one investor who overall has more than 50% of all investor shares, in which case they will hold the cards regardless.

How many board meetings per year are you committing to?

When you do a funding round you’re committing to your investors to hold periodic board meetings. But board meetings are an admin overhead – most founders would rather be working on product or sales than preparing board meetings, so the question is, how many board meetings a year should you commit to?

What the data shows

The data shows that the market standard is quarterly board meetings.

What this means for you

If investors ask for monthly board meetings show them this chart, explain that it takes 1-2 days to prepare the board pack, you’ll be slowing your development if you have to do that monthly. If the investor insists, try to quarterly board meetings with a short monthly KPI / revenue update in between.

Many founders don’t understand the role of the board chairperson, they think it’s some kind of advisor, someone you hire to look good on the pitch deck. But actually the chair’s role is very different. While the chairperson tends to be one of the directors – and just like the other directors, they have legal obligations as a director to act in the best interests of the company – they are also responsible for ensuring the orderly proceedings at the meeting and to prepare an accurate set of minutes of the meeting afterwards.

Additionally, in the event of an even number of votes for and against on a board resolution, the chairperson can have the casting vote (you can choose to have that, or not, when you set up your round on SeedLegals – see below). If the chair has a casting vote, that gives them even more power. So you’ll want to choose the chairperson wisely.

At SeedLegals we’re keen to help founders understand the function of the board and design their board so it will work for them, not against them, particularly if things don’t go to plan later on. Which is why we build into the funding round documents the ability to specify who can be appointed chair of the board, with a default that the chair will be appointed by one of the founders.

What the data shows

The data shows that most times companies go with the SeedLegals suggested choice, which is that the chair is appointed by the founders. In later-stage rounds that changes, first so that the chair is increasingly selected by the board collectively (so the investors have a say), and in a small number of rounds that the chair is appointed by the investors, or by the lead investor.

What this means for you

We recommend that, so long as the founders get on with each other, that the founders aim for a founder-led board, which means that the founders outnumber the investors on the board, or at least equal the number of NEDs and investors directors on the board, and that the chairperson is appointed by the founders. In some cases you may not be able to push back on an investor request that they be the chair… if you do get that request you may wish to remind the investors of all the onerous tasks that the chairperson needs to take on, some of which are covered here, and hopefully that will help them understand they really didn’t want that role.

Here’s a rough guide to how companies often set up their board:

Early-stage angel round:
3 directors total, all appointed by the founders.

Angel round with investors who want more company oversight:
3 directors total, of which 2 appointed by the founders and 1 Independent Director (NED) or Investor Director appointed by the investors.

Seed or Series A round with fund or VC investors:
5 directors total, of which 3 appointed by the founders and up to 2 Independent Directors (NEDs) or Investor Directors appointed by the investors.

If you’re planning to allow for Instant Investment top-up later, leave enough room here to appoint any additional directors that later investors might want.

These board positions will be reserved for the founders themselves or people who they choose (if there are more Founder Director positions than founders).

These board positions are for Independent Directors, who are directors typically appointed by the board itself, and they tend to be the candidates who are acceptable to founders and investors alike. These can be Non-Executive Directors (NEDs) whose job is to bring an independent voice to the board. Independent Directors will have a vote on the board just like any other director, but won’t have any special veto powers beyond that.

Investor Directors tend to be the investors’s voice on your board. Decisions which would otherwise have needed a burdensome shareholder vote can instead be made with Investor Director Consent. Investor Directors by default get an investor director consent right (you can fine-tune this in Advanced Terms), which means they have a veto right over some company decisions – those decisions are listed in a Schedule of the Shareholders Agreement.

If several investors are asking for Investor Director positions you might instead offer them Observer positions, see below, to keep your board lean.

Your investors are going to expect periodic updates that include details on company performance, business plan updates, financial information, etc.

These would normally be expected by the new investors in this round, but you can specify that existing investors or all shareholders will get sent investor updates too.

What the data shows

In the company’s first funding round there aren’t any existing investors, so it’s only the new investors in the round that investor updates will be promised to (the founders not needing any updates themselves, of course).

But, starting the second funding round onwards, there are now existing investors too, and they now get included.

What this means for you

Investors value periodic updates from companies they’ve invested in. In fact it’s a common complaint amongst investors that founders promise periodic updates, but the only time they hear from them is when they need more money. Since it’s no more effort to share updates with everyone, our suggestion is that updates get sent to both new and existing investors.

To avoid the founders taking the money and retiring, investors usually require that founders ‘reverse vest’ their shares over a number of years. If a founder leaves during the vesting period they need to transfer back the unvested shares. Even if their shares are fully vested before the round, investors will often ask for a new vesting schedule to dissuade the founders from leaving right after their investment. If you need to justify to your investors why vesting should not start again you would explain that e.g. your shares were earned in exchange for years of work at no salary, etc. See how vesting also protects founders from themselves, and see our statistics on salaries and vesting.

If the founders previously signed a Founder Agreement then their shares will likely have begun vesting at that time. Or, if the investors want share vesting to start (or restart) now, then select the date of completion of this round.

The founders’ shares (those that have not already vested) will vest in equal amounts over this period.

Investors will often ask for 4 year vesting and a 1 year cliff, founders usually push for 3 years and no cliff.

If some fraction of the founders’ shares have already vested, you can specify that here.

The cliff is the time until the first set of shares vest. If some shares are already vested at the vesting start date, then no more will vest until the end of the cliff. At the end of the cliff, any shares that would have vested during the cliff period will immediately vest at that point.

A Bad Leaver is someone who is fired for fraud, gross negligence or gross misconduct.

If a founder is fired for that, should they lose all their shares, even ones that have already vested? Or only lose their unvested shares? Losing shares that have already vested is harsh, but some companies think that’s the right thing to do if a founder is a bad leaver.

The nil value is, well, zero.

The fair value is the price that the shares could be sold at today, as determined by an expert valuer. Be aware that the company could obtain a valuation that sets the fair value as close to zero, so fair value is often not as fair as one might expect.

Imagine that a founder or employee is fired for gross misconduct 5 years from now, well after all their shares have vested. Should they still lose all their shares? You can specify here whether the Bad Leaver provisions finish at the end of a person’s share vesting period, or continue for the duration that the founder or employee remains with the company.

A Good Leaver is someone who leaves because of death, accident or disability, excluding voluntary departure.

If a founder dies or has an accident that leaves them unable to work, it would be gracious to let them or their family keep their vested shares. But having a big slice of the company’s equity locked up and non-productive is a barrier to future funding rounds. So a Good Leaver is usually allowed to keep their vested shares, but forced to transfer their unvested shares for fair value.

A Forced Leaver is a founder or employee who’s forced out of the company, perhaps because they were under-performing or by the new owners on a sale of the company.

Founder fallouts are surprisingly common, the company being able to reclaim at least the unvested shares helps minimise the damage if one of the founders needs to be terminated.

The fair value is the price that the shares could be sold at, as determined by an expert valuer. Note that the company could obtain a fair value valuation that is close to zero (a founder is leaving, limited remaining cash, etc.) so be aware that the fair value can be manipulated to be lower than you might expect.

A Voluntary Leaver is a founder or employee who leaves because they got bored or found another job.

The general expectation is that if you leave the company by choice you lose your unvested shares, but your vested shares are yours. But that may not be acceptable to investors and could make the next funding round more difficult, so a compromise is that a founder leaving during the vesting period only keeps their vested shares with board approval, otherwise they need to sell them at fair value.

Or, for an extreme Stay Or Lose, you can specify that if someone voluntarily leaves anytime during the vesting period they lose both their unvested and their vested shares.

If a founder leaves the company and they’re obliged to give up their shares, those are usually offered to all shareholders. But, to allow the founders to preserve their shareholding in the company, you can instead specify that other founders have the first right to buy back those shares. If the other founders don’t take up that right, for example if the shares are being sold at Fair Value and the other founders don’t have the money to buy them, then they would be offered to all shareholders.

An alternative is to turn unvested shares into deferred shares of very little value. Only unvested shares that would otherwise have to be sold at nil value will be turned into deferred shares, any that are to be sold at Fair Value will be offered to other shareholders. To a company on SeedLegals’ documents this option will always be available, but you can make it the primary option.

Founders often aren’t paid a salary, so to help them get value from the company and to realise their startup dream without waiting years for a sale or IPO of the business, it’s desirable for a founder to have the right to sell some of their shares, for example as part of the next funding round. That will dilute the founder, for sure, but it’s a great way to turn those years of effort into cash, hopefully at the super-low 10% Entrepreneurs’ Relief tax rate. You may need to do some up-front persuasion with your investors to let you have this provision. A typical value here would be 10%.

Often in early stage startups founders don’t pay themselves a salary, and investors expect that they won’t do so for some time. But founders have mortgages to pay too, and they may have invested a lot of their own money into the business already, so they may need and be expecting to be paid a salary – see our founder salary statistics.

Our data shows that founders put a median of £26,000 of their own money into the business before the first funding round. Why? Because nobody invests on just a PowerPoint slide deck, investors expect you to have built a prototype, validated the idea, etc.

If the founders have put money into the business, rather than just write it off as spent, it’s much better if that amount can be classed as a loan that can be repaid later, or turned into equity in a later funding round to reduce the founder’s dilution in the round.

In the case of a breach of the warranties, it’s customary to cap the liability of the founders to either their annual salary or capped at a specific £ amount. For example, if you’re raising £500K and there are 2 founders then a cap of £25K per founder might be appropriate.

Selecting a specified amount is useful where founders aren’t initially being paid a salary, as obviously 1X a salary of zero isn’t much of a liability incentive.

You can also specify that the founders have no personal warranties liability at all, so the investors can only claim against the company. Which is obviously desirable as a founder, the challenge is the investors may push back on that and demand that the founders have some level of personal liability, so they can claim against the founders if e.g. the company is insolvent at the time of the claim.

Directors and Officers (D&O) Insurance covers the directors of the company if they get personally sued by an investor, customer, etc. It’s good practice to have this in place once your business has investors, users or customers. In some cases your investors might want you to commit to actually having that in place within 3 months of closing the round, if you want to offer this commitment you can do that here. Of course you can always get such insurance regardless anytime, this is simply about committing in the Term Sheet and Shareholders Agreement to do so.

In the old days the company and each investor would engage their own lawyers. If you had a Lead Investor, they would ask the company to pay their legal costs. Our goal is that nobody needs lawyers, for a dramatic time and cost saving all round.

If your lead investor (or other investors, if there’s no lead investor) want to use lawyers, sure, but the idea is that they pay for their lawyers themselves. Hopefully that’s something you can agree on. But occasionally a lead investor (or other investors, if there’s no lead investor) may insist that you pay their legal costs. If you’re okay with that, you can specify that here.