Why does it take so many pages of documentation and legalese to take these investment dollars?
Startup clients often wonder why they need dozens of pages of explainers, disclaimers, projections, and regulatory references to take on cash from investors.
The first answer is that unless these investors will be actively involved in the business, or unless the dollars coming in are simply loans, you are most likely selling securities. The sale of securities is a heavily regulated thing, whether you are an evenings-and-weekends startup or listed on the NYSE.
The second answer is that whenever you are dealing with substantial amounts of money — investment amounts worth arguing over and worst case suing over — ideally you will have the terms of the deal and everyone’s assumptions and expectations spelled out.
So these are the main purposes, in my view, of the documentation needed for taking on investment. It need not cost five figures for a relatively simple seed-stage opt angel startup funding. But it is worth having the documents prepared professionally, correctly, and tailored to your business.
The benefits of proper documentation are several:
– regulatory and legal compliance alleviates risk of getting into a jam with the SEC or state securities commissions
– if all potential dollars are not realized, disclosures and signed documentation with investors will help your company deal with any disgruntled investors who might want to make claims against the company and its founders for lost funds
When your documents are prepared and delivered, a few dozen pages are the norm for a convertible debt or equity offering. More than many people are used to reading in the era of social and mobile-optimized content and overall tl;dr syndrome. But the content of these documents matter. And for many early stage companies, going through the exercise of preparing these communications and plans to potential investors is a good exercise in planning, focus, and getting the company’s underlying paperwork in place.
Next week: What should be in my disclosure to investors?