Chapter 3 - Start Up Fundraising
IN THIS LESSON
Intro to Contracts for Raising Capital
Contracts are normal part of doing business. They protect you, and they protect the interests of investors, advisors, partners, and employees. Contracts are a very serious deal, which is why this is where a good lawyer comes into play for your start-up.
When you are raising money for your company, two of the initial contracts you will have to deal with are:
Equity contracts – contractual agreement to give someone a specific amount of equity (ownership) of your company in return for either investment money to spend on the business or for labour (work) done to advance the interests of your company.
Debt contracts – agreement with a bank or other financial institution that states you owe a debt to them for the money you borrowed for your business, plus regular interest payments to be paid on top of the principal balance that you owe.
You may already be familiar with these types of contractual agreements if you have ever borrowed money from a bank to buy a house or got stock options at a company. One type of contract that may not be as familiar is an advisor agreement.
In most cases, advisors are compensated with an equity stake that typically ranges from .15% to 1% of the outstanding common stock of a company. Advisor equity is most commonly subject to vesting monthly over a two-year period, but it needs to be approved by the Board of Directors.
One important thing to note is that an advisory agreement is not the same as an independent contractor agreement, which is another contract you will use (with contractors).
The following are four things you need to know about contracts:
Confidentiality clause – to keep the information within your company confidential
Intellectual property protection / short invention clause – to prevent someone stealing your product ideas.
Non-compete clause – to stop someone from working with a competitor while working with you.
Clear statement about what laws and courts apply (in case of a dispute) – to avoid someone suing you in another country with very different laws.
Remember to use the services of a good lawyer with experience working with start-ups. If there is anything that you splurge on when it comes to spending money in a start-up, it is most definitely legal services. You don’t want to skimp on lawyers, especially when it comes to contracts. If you get your legal paperwork in order early on, you will be in a strong position to drive growth over the long term.