What legal documents are needed before raising investment?

Brenova

What are the essential legal documents and agreements that a startup or business should have in place before raising investment from angel investors, venture capital firms, or other funding sources, and why are these documents important during the investment process?

Aditi

Before raising investment for a business in India, it is important to prepare the necessary legal documents to protect the interests of both the founders and the investors and to ensure compliance with applicable laws.

Key points:

Company incorporation documents: Keep the Certificate of Incorporation, Memorandum of Association (MOA), Articles of Association (AOA), PAN, and other registration documents ready.
Founders' agreement: If there are multiple founders, execute a founders' agreement outlining ownership, roles, responsibilities, vesting, and dispute resolution mechanisms.
Shareholders' agreement (SHA): This agreement defines the rights and obligations of shareholders, including voting rights, transfer restrictions, exit rights, and investor protections.
Term sheet: Prepare a term sheet setting out the key commercial terms of the proposed investment, such as valuation, investment amount, equity offered, and investor rights.
Due diligence documents: Maintain updated financial statements, tax filings, statutory registers, intellectual property records, material contracts, and regulatory licenses for investor review.
Employment and IP agreements: Ensure employment contracts, confidentiality agreements, and intellectual property assignment agreements are in place so that the company's assets and IP are properly owned by the company.
Board and shareholder approvals: Obtain the necessary board resolutions and shareholder approvals required for issuing shares and completing the investment transaction.
Regulatory compliance: Ensure compliance with the Companies Act, 2013, applicable FEMA regulations (if foreign investment is involved), securities laws (where applicable), and other statutory requirements.