The Close Relationship Between Law, Governance, and Fundraising
Founders who ignore legal and regulatory frameworks tend to fail at raising funds because they treat governance as an afterthought.
In this issue, we will explore how law and governance influence fundraising — and how how founders can leverage effective governance to succeed at raising capital.
Many founders tend to think about their legal obligations and fundraising as two separate things — or as things that emerge at two separate stages of their startup. But when you look at the full life cycle of a startup, from pre-seed to Series B and even through to exit, law and governance play a role in fundraising. The relationship is so inextricable that it creates problems for founders who choose to ignore one or the other.
To raise funds successfully, founders need to put the legal building blocks in place that make them investable — a properly formed entity, clean founder agreements, and intellectual property that actually belongs to the company. It goes both ways — for legal and regulatory frameworks can just as easily hurt fundraising and drain resources when set up wrongly or is completely missing.
Many of these mistakes are born out of resource constraints. There is a rise of SaaS startups globally, and these rising founders mostly build with little cash and almost no support, resulting in long bootstrapped seasons. That forces lean teams to resort to do-it-yourself legal work, which can hurt the startup once it picks up momentum — or, in the worst case, completely deprive it of the opportunity to take off.Early mistakes and omissions damage the very foundation of a startup.
This is why Startup GPS exists: to provide navigation for founders making key decisions about governance. Whether you’re working toward fundraising or simply toward a set objectives. This newsletter will take you through the founders journey from pre-seed to Series A. We cover the topics that matter most to founders based field experience working with startups and ventures. Our content explores legal and regulatory foundations and resources that enable founders to self-audit, determine investment readiness, and understand their risk.
After forming a legal entity, many startups continue to suffer from resource constraints that often make the entity become non-compliant. This is particularly true of founders who are reluctant to raise money because they do not want to give up equity, or those who seek to raise from venture capitalists but struggle to raise from their home country.
You can own 90% of a company worth nothing, or you can own 60% of a company worth tens of millions of dollars, but you cannot have it both ways.Paul Swegle
Some founders pursue high growth by seeking venture capital really early on, or even before an MVP is engineered. Others pursue slower-growth strategies — bootstrapping or take smaller investments in a drive to profitability at a more modest revenue level — an approach referred to asseed strapping. There are also founders with high growth expectations who are unwilling or unable to tap venture capital because their current structure limits them, whether due to geographical limitations or entity type. For them, we explore alternatives like grants, crowdfunding and mini-IPOs.
Whatever path you choose, designing and executing a fundraising plan requires you to focus on the laws that affect your industry and the governance frameworks that apply to your product. Combining both allows you to develop acomprehensive fundraising plan— one that addresses questions like:
- How much are you looking to raise, and when?
- What milestones will each funding round support?
- How do you find a large pool of promising investors?
- How do you connect with those investors — and get them to believe in your vision and mission?
- What investment instrument works best in different situations?
- How do you negotiate reasonable terms in different types of funding rounds?
- How do you close the deal?
- How do you work with investors after the deal to maintain their support and avoid unnecessary friction?
None of this is possible without a proper foundation:a well-formed entity, executed founder agreements, an operating agreement, and intellectual property assigned to the company.That foundation is what gives you the robust information you need to build a fundraising plan worth executing.
For pre-seed founders seeking venture capital — at the early stages, you don’t really have to register with the SEC. But you must still follow a set of securities regulations. The two most common ones you should be aware of are SEC Regulation A and SEC Regulation D. Corporate governance laws actually do change how startups grow and whether they can be sustained in the long-term.
In the next issue, we will explore key fundraising concepts such as Regulation A and Regulation D of the SEC for startups seeking to raise funds — along with a framework you can use to stay legally compliant during fundraising rounds.
Journey of No Return
Dear Founder,
You’ve built an amazing product, and you’re ready to go to market. You immediately realize thatgoing to market requires some capital.So you’re wondering where to go — and your default thought is to go the venture capital route.
Truth is, the path to vc funding without a governance framework in place is like a going on a journey of no return. Back in my boarding high school days in the infamous Kings College Lagos, as part of our indoctrination into our assigned houses, a senior student would send a junior student on an errand to another senior student. The task required the junior student to request from the senior student a book titled “the journey of no return”: which was code for “send this junior student to another senior student until they figure it out”.
The objective was to waste the students time until they learned to be smart enough to navigate errands in the boarding house, i guess.
Why am I telling you this?
Because the journey towards raising funds from venture capital can be like the journey of no return. And you don’t want to be that founder who keeps attending meetings in pursuit of capital at the expense of actually building your business.
Stay motivated in your venture, and thanks for reading! 🙏🏻
Please share with someone who would get value from this.
Victor...
