A great idea, a strong team, and technology with real potential. These are usually the first things a founder thinks about when preparing for conversations with investors. Legal matters often appear much further down the list. And that is exactly where the problems can begin…
In the first episode of the Blockchain Startup School series, Wojciech Ługowski explained why a startup’s legal preparation should begin much earlier than when it comes time to sign an investment agreement.
And although some time has passed since the webinar, the issues discussed during the conversation remain highly relevant. This is particularly true for founders of technology, blockchain, and Web3 startups planning to raise capital.
Investors look at more than just the product
A founder may have an excellent pitch deck, their first customers, and an ambitious growth plan. But an investor will want to see more.
- What does the company’s ownership structure look like?
- Are the relationships between the founders clearly regulated?
- Who owns the rights to the technology?
- Have the key agreements been properly executed?
- Is the business model compliant with applicable regulations?
These issues can have a significant impact on the decision-making process. If the company is well prepared, discussions with an investor can proceed much more smoothly. If it is not, legal problems may emerge at the worst possible moment.
Due diligence quickly reveals what has been put off until later
One of the stages at which a startup’s legal position is examined particularly closely is due diligence. This is when issues that may previously have seemed secondary often come to light.
- Missing or inadequate agreements with founders.
- Unresolved ownership of the code or other intellectual property rights.
- Documentation that does not reflect how the company actually operates.
- Arrangements based more on “we all know what we agreed” than on legally binding documents..
As long as the company operates within a small group of people, such arrangements may appear sufficient. Once an investor comes to the table, the situation changes. Each of these issues may lead to additional questions, require changes to be made, or prolong the investment process. In some cases, they may also affect the terms of the investment itself.
A term sheet is about more than valuation
Discussions with investors often focus on the amount of funding and the company’s valuation. These are, of course, important, but they are not the only considerations. Even at the term sheet stage, arrangements are made that can have a real impact on the company’s future and on the position of its founders.
- Who will have a say in key decisions?
- What rights will the investor receive?
- What will the corporate governance structure look like?
- What will happen in the next funding round or in the company is sold?
For this reason, the term sheet should be treated as the stage at which the foundations of the future relationship between the founders and the investor are established.
Blockchain adds another layer
For blockchain startups, traditional investment-related issues are accompanied by additional questions concerning the project structure, jurisdiction, tokens, the distribution model, financial market regulations, and the relationships between the company, investors, and the community.
In practice, this means that a lawyer should not become involved only after most of the business decisions have already been made. A well-designed legal structure can support, from the outset, the way the project intends to grow, raise capital, and enter new markets.
This is particularly important in a sector where technology and regulation are evolving in parallel.
Is the “legal layer” really a MUST-HAVE?
If a startup is serious about attracting investors, the answer is simple. Legal matters cannot replace a good product, a strong team, or a sound business model. They can, however, make the entire project clearer, more predictable, and more credible from an investor’s perspective.
And this matters not only during the first funding round. Decisions made at the beginning of a company’s life often resurface during subsequent investment rounds, international expansion, changes to the ownership structure, or the sale of the business.
That is why it is worth thinking about legal matters not as an obstacle to overcome before a transaction, but as one of the building blocks of a company that is ready to grow.
For more on the legal issues founders should consider before entering into discussions with investors, the factors that may affect the investment process, and the areas where risks most commonly arise, Wojciech Ługowski provides a detailed explanation during the webinar.
The full webinar recording is available below.