The Startup Legal Checklist: Eight Documents Every Founder Should Have in Place Before Raising Capital
Raising outside capital is one of the most legally significant events in the life of a startup. Before you hand a term sheet to an investor, or accept one, your legal house needs to be in order. Investors conduct due diligence, and what they find (or fail to find) in your corporate records will directly affect their confidence in your management team, the terms they offer, and whether the deal closes at all.
This checklist covers the eight foundational legal documents that every startup should have in place before it enters a capital raise. None of these is a luxury or a nice-to-have. Together, they form the legal foundation that serious investors expect to see and that protects the company in the years ahead.
1. Formation Documents and Corporate Records
This starts at the most basic level: your company's formation documents must be complete, accurate, and in order. For a corporation, this means your articles or certificate of incorporation (and any amendments), bylaws, initial organizational board resolutions, and any shareholder agreements. For an LLC, this means your articles of organization and, critically, your operating agreement.
The state of incorporation matters. Discuss possibilities with your counsel and understand the benefits and drawbacks of the choice.
Common due diligence problems at this stage include bylaws that are inconsistent with the articles of incorporation, missing organizational resolutions, and cap tables that do not match the company's formal equity records.
2. A Clean Capitalization Table
Your capitalization table is a record of every person or entity that holds an ownership interest in your company, the type of interest they hold (common stock, preferred stock, options, warrants, convertible notes, SAFEs), and the number of shares, units or other interests they hold. It is the definitive record of who owns what.
Before a capital raise, your cap table must be accurate, current, and consistent with your corporate records. Specifically:
All previously issued equity must be documented with properly authorized board resolutions.
Any options or warrants must reflect current grant prices and vesting terms.
Any previously issued convertible notes or SAFEs must be listed, with their conversion mechanics clearly understood.
Cap table inconsistencies — shares that were issued without board authorization, options that were granted without a formal plan, or beneficial ownership that does not match formal record title — are among the most common problems uncovered in early-stage due diligence. Fixing them before an investor discovers them is far less expensive than addressing them under the pressure of a closing timeline.
3. Equity Incentive Plan and Grant Documents
If you have granted equity compensation to employees, consultants, or advisors (or plan to) you need a properly adopted equity incentive plan. In a corporation, this is typically a stock incentive plan that authorizes the issuance of options or restricted stock and establishes the framework for their terms. In an LLC, equity compensation is more complex but achievable through properly structured profits interest arrangements or phantom equity plans.
Each individual grant must be documented with a grant notice and option agreement (or equivalent) that specifies the number of shares, the exercise price, the vesting schedule, and the applicable termination provisions. Undocumented equity grants are a serious legal problem that can create disputes with the recipient and liability for the company.
4. Founder Vesting Agreements
Many investors in early-stage companies expect founder equity to be subject to vesting, a schedule that requires founders to "earn" their equity over time by remaining with the company. A typical structure is a four-year vesting schedule with a one-year cliff, meaning that 25% of the founder's equity vests after the first year and the remainder vests monthly or quarterly over the following three years.
If your founders received their equity without a vesting schedule, you are likely to face this issue in due diligence. Investors understand that founding teams change, and unvested founder equity means that a departing co-founder could walk away with a large percentage of the company, diluting everyone else's upside. Working with a securities attorney to implement a founder vesting arrangement early, ideally at formation, is far easier than trying to do so after the company has value.
5. Intellectual Property Assignment Agreements
Your startup's most valuable assets are almost certainly its intellectual property. This can include, but is not limited to its software, technology, brand, trade secrets, and proprietary processes. Those assets belong to the company only if they have been properly assigned to it by the individuals who created them.
Every founder, employee, and consultant who contributed to the development of your IP should have signed an intellectual property assignment agreement that expressly transfers ownership of all company-related work product to the company. These agreements are sometimes combined with invention assignment and confidentiality agreements (IACAs or PIIAs — proprietary information and invention assignment agreements).
Missing IP assignments are one of the most serious due diligence issues an investor can find. If a founder or early employee who no longer works at the company owns key intellectual property in their own name, fixing that problem after the fact can be expensive, time-consuming, and potentially deal-killing. In some instances you could find it impossible to fix the problem and the company ends up not “owning” what it believed it did.
6. Employment Agreements and Offer Letters
Your employment relationships must be documented with clear, legally appropriate offer letters or employment agreements. These documents should address compensation, benefits, job title and responsibilities, at-will employment status (in Florida and most states), confidentiality obligations, and IP assignment requirements.
For senior executives, a more detailed employment agreement may be appropriate, addressing severance arrangements, non-competition and non-solicitation obligations, and equity compensation terms. Verbal employment arrangements or informal compensation understandings are a source of significant risk and investor concern.
7. A Private Placement Memorandum (PPM) or Other Documentation for Any Prior Capital Raises
If your company has previously raised capital from outside investors the existence of a properly documented offering is relevant due diligence for future investors, even if the prior investors were “friends and family.” Prior investors who were not provided with appropriate disclosure may have rescission rights, and undisclosed prior offering violations can affect the current offering's exemption or the acquirer's risk assessment in an M&A transaction. Additionally, without proper documentation your company (and possibly you) could have violated federal and/or state securities laws.
If prior capital raises were not properly documented, this is not necessarily fatal, but it requires a careful assessment with an experienced securities attorney before the current raise proceeds.
8. Material Commercial Contracts
While not a single document, the set of material commercial agreements your company is party to, including customer contracts, supplier agreements, software licenses, leases, partnership arrangements, must be organized, accessible, and reviewed before you expect investor scrutiny. Specifically:
Identify any contracts with change-of-control provisions, which can give counterparties the right to terminate or modify the agreement upon a sale of the company.
Review the assignability of key contracts, particularly if a strategic acquisition is a potential future outcome.
Ensure that all contracts reflect the actual terms being observed in practice.
The Takeaway
No startup gets every one of these items perfectly in order on day one. What matters is a demonstrated commitment to proper legal hygiene and a management team that takes these obligations seriously. Working with an experienced business attorney early in the life of your company (and certainly before you are under the time pressure of a capital raise or an acquisition) is the most cost-effective way to build the legal foundation that investors, partners, and future acquirers will need to see.
The Law Office of James G. Dodrill II, P.A. helps founders and startups build the legal infrastructure they need to raise capital and grow.
Disclaimer: This blog post is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Reading this post does not create an attorney-client relationship with me or my law firm. Reach out for a consultation and to obtain advice specific to your individual legal needs.