Once you sign an agreement with one or more investors, its effects can significantly shape your company’s future.
That includes the investor rights that shape governance, the exit strategies you are bound to and obligations your company must meet. We work with founders who want to avoid conflicts down the line by negotiating investment terms today that preserve operational control and reduce the risk of misalignment with future investors.
Being involved in equity financing can be highly stressful and confusing for first-time entrepreneurs.
The process of negotiating documents, dealing with investors’ due diligence demands and trying to run and drive the business can be exhausting. And, in order to achieve the best deal for your company, it’s important to be mentally sharp and focused.
So, we’d like to demystify some of the financing process by explaining the types of documents used in a typical equity financing round for Angel investors and the more comprehensive portfolio of documents employed by venture capital firms and other institutional investors. Based on our experience, the types of documents used are generally of the following types:
For typical documents for an Angel investor, we’ve used and seen other counsel use these documents:
Let’s review their typical terms and the basic function of each document:
The Term Sheet is the document that gets the ball rolling.
It is a largely non-binding summary of many of the key terms of the financing. Its function is to ensure agreement between the investor or investors and the company on the basic outline of the financing. It typically contains, among other provisions:
The point is that if the parties can’t agree on the Term Sheet, there’s no point in going further. They just don’t have the makings of a deal.
The only formally binding terms in this otherwise non-binding Term Sheet would be the “No Shop” clause and the confidentiality provisions. The amount of time for the duration of the “No Shop” clause is generally negotiable, based on the complexity of the business involved. It’s not unusual to see this set at 60 days.
However, it doesn’t stop there.
Many entrepreneurs who do not work with an experienced business attorney early in this process make the mistake of assuming that terms in the Term Sheet are easily renegotiated after it has been signed. That’s generally not a safe assumption. Entrepreneurs who negotiate and sign Term Sheets without legal advice may agree to terms that are far more onerous than they could have obtained with the help of counsel.
Although the Term Sheet is “non-binding,” it is “non-binding” as to whether the parties are required to enter into a transaction. While the terms of the Term Sheet covering matters other than confidentiality and “no shopping” are technically “non-binding,” entrepreneurs and their counsel will encounter great resistance from counsel to the investor or investors for any material changes. And any material changes can sink the prospects of making a deal.
We have seen experienced counsel use this technique in resisting additions of material terms by investors when their counsel failed to include them in the Term Sheet – as well as for founders. So, working with your legal counsel early in the investment process can avoid costly mistakes and potentially provide some further opportunities for gains.
An experienced counsel is an expert in the “dance” of negotiation. When the investors ask for something not contained in the Term Sheet, your counsel can condition the grant on receiving some beneficial accommodation on another provision. The benefit of this approach is that it decreases the incentive for continuing to ask for concessions on items not covered in the Term Sheet, since you will have signaled that any request for changes will be coupled with a counter request for beneficial changes for the company.
It’s part of the “dance.”
If the investor or investors can’t come to a decision to move forward and enter into definitive binding documents with the company during the restricted period, the company would be free to find another suitor, even if the first potential purchasers continue their due diligence.
Confidentiality obligations sometimes need to be customized. Some sophisticated and frequent Angel investors seek to pare this back. Their rationale is that they may see dozens of potential investments, some potentially from competitors of the company with which they’re then in discussions. And, they may have investments in competing companies. So, care needs to be taken when dealing with any diminishment of these protections for the company. This is also frequently the case with venture capitalists and other institutional investors, who may see hundreds of presentations from companies every year.
Assuming we’ve negotiated these hurdles, the negotiation of the other documents comes next.
The Stock Purchase Agreement covers the exchange of cash from the investor or investors to the company and the issuance by the company of the stock, frequently preferred stock, to the investor or investors. It will contain representations and warranties by each party.
The Stock Purchase Agreement covers the representations and warranties – guarantees by each party to the other of various facts. They also constitute conditions that must be true at the closing to compel the investors to deliver the funds they promised. It also provides for remedies in the event of a breach by the company or one of the investors. An additional condition that must be satisfied before the closing is the filing with the Secretary of State of the jurisdiction in which the company is incorporated of the Amended and Restated Certificate of Incorporation that sets out the terms of the preferred stock to be received by the investors. Another condition is the execution and delivery of an Investors’ Right Agreement.
This agreement provides the investors and other stockholders with extra rights. It typically covers the right of investors to financial statements and other information about the company. Further, it has some unique rights.
Many investors in startup companies want to control who owns shares and how they can protect and maintain their percentage interests as the company grows and enters into further financings. So, many of these agreements have “Right of First Refusal” provisions. These give the company and, if the company doesn’t exercise its rights, the stockholders, the right to purchase the shares of another stockholder who desires to sell shares to a third party.
Many such agreements also have a “Tag Along” right. This is a right of each stockholder to sell shares to the entity trying to purchase the shares of another stockholder (where the Right of First Refusal has not been exercised), typically a founder, in proportion to the stockholder’s percentage interest in the company. The concept is that if a founder is “getting out,” I want to get out too!
Finally, there are “Drag Along” rights. These rights require stockholders to consent to transactions – typically for the sale of the company or most or all of its assets – that have the consent of the Board of Directors and a majority of the shares held by equity holders. The reason for this is to eliminate litigation on whether the sale transaction was “fair” since if everyone has consented and is receiving the same compensation per share, it’s hard to argue that the deal does not treat everyone fairly.
But, this determination needs to be discussed with your legal counsel to ensure it applies to your situation.
That brings us to the Amended and Restated Certificate of Incorporation.
This is the instrument under corporation law that sets forth the rights and privileges of all the stockholders. Sometimes it’s just referred to as the Certificate of Incorporation.
We prefer to have it described as “Amended and Restated” so that you can look at one document that incorporates all of the changes made previously, rather than having to piece them together from a series of separate amendments. Review of this document is critical to understanding the limitations on actions by the company and rights of the investors to oversee/meddle/control actions of the Board and the officers of the company. We cannot overemphasize the need to focus on this document.
Corporate governance has tremendous implications for the trajectory of the company – and ultimately, the control of the founders. Our experience has been that founders who do not focus on these issues wind up being sorely disappointed with the results. Be careful! And discuss this document in detail with your legal counsel.
This is “the cream of the crop” and the most sophisticated, experienced and demanding investors. This is where experienced counsel can best help a startup.
Venture capital and institutional investors (collectively, “VCs”) have great leverage and expert assistance in various areas – legal, technical, regulatory, financial and other areas relevant to a company. They also have more exacting requirements than Angel investors.
Since the 1970s, representatives of VCs and their legal counsel have met to create more standardized documents for use in investment transactions with startups and other private companies. The purpose of creating these standardized documents is to:
The library of standard documents includes the following primary documents:
The Term Sheet, Certificate of Incorporation, Stock Purchase Agreement and Investors’ Rights Agreements perform much the same function as those documents used for Angel investor financings but in much greater detail.
The Voting Agreement focuses on the agreement of the parties to vote for particular individuals as directors and in favor of transactions approved by the Board of Directors and a majority of the stockholders. The Right of First Refusal and Co-Sale Agreements covers in greater detail similar provisions in the Angel investors’ Investors’ Rights Agreement. The Management Rights Letter is required under regulations of the U.S. Department of Labor to avoid having a venture capital fund with investments from pension funds classified as a fiduciary under the Federal Employee Retirement Income Security Act (“ERISA”).
The Indemnification Agreement is the promise of the company in which the investment is made to protect from lawsuits and other liabilities the person who is elected by the investors to be a director of the company.
Counsel to VCs and institutional investors in our experience are very resistant to any significant – and sometimes insignificant – changes to a term set out in the “non-binding” Term Sheet. So again, having your counsel involved at the Term Sheet phase can be important for the entrepreneur and his or her company to achieve the optimal structure for the proposed investment.
At Crowley Law LLC, we work with startup founders to negotiate investment agreements that match the realities of the development timelines of the company, customized scientific milestones and layered exit strategies.
We help founders identify the clauses that look harmless now but limit decision-making later.
We work with founders to build governance structures that don’t just look good now but still function when timelines stretch, pivots happen or new investors enter.
We model how voting rights, liquidation preferences and anti-dilution clauses play out in future funding rounds or mid-tier exits—because that’s when many investment agreements show their real cost.
We collaborate with your other advisors to align the legal terms of each set of investment agreements with your business strategy, valuation expectations and investor relations goals.
We look closely at investor rights and protective clauses to help founders preserve decision-making power and avoid losing influence through slow dilution or board creep.
Start with the terms that impact control and downside protection. Liquidation preferences, anti-dilution clauses and protective provisions can quietly shift leverage even when equity stakes look fair. We help you identify which provisions carry risk as the business scales. Prioritize the terms that still work several rounds from now.
Start by negotiating voting thresholds and board composition before you sign the term sheet. Many founders give up control by agreeing to protective clauses that require investor approval for everyday decisions like hiring or raising more capital. You can push for limits—by dollar amount, business area or specific triggers—that still protect the investor without tying your hands. We walk clients through each clause and model how it will impact real decisions both now and two rounds down the line.
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