Most startups, at some stage, decide to go for seed funding from various types of investors. At this stage, it’s important that you know the set of legal documents you might need once you find the right investors. Missing out on any of these documents or the knowledge can send a wrong impression to the investors, which might lead to an image that you are not quite prepared for the seed finance.
This blog lists down and introduces 5 basic documents required to seek funding for startups in India. These are a must-have, so let’s understand them properly.
5 documents required to seek funding for startups
You might be sharing host of important information with your investors to get them onboard, the most important of all being your business idea in the form of business plan, financials, pitch deck/ presentation etc. It is important that you sign a Non-Disclosure Agreement (NDA), barring the investors from sharing this information with any third-parties or to use for any other purpose than contemplated.
This ensures safe pitches of your business idea to number of investors without any fear of misuse of your idea and data.
Valuation report comes as a mandatory requirement under law when you set out to seek funding for startups. Valuation by a registered valuer is required as per the Companies Act, 2013 and a merchant banking valuation is required as per the Income Tax Act, 1961.
It also helps you get a fair market value of your shares and makes it easy for you to decide on the price at which you are looking to issue shares to the investors.
There are however certain exemptions as regards to valuation if you are a DPIIT registered start-up.
A Term Sheet lays down the terms on which the investors are willing to provide seed funding and the promoters/ founders are willing to seek fund. It’s a non-binding document that clearly provides for the most basic and important terms that are eventually captured in detail in the Share Subscription and Shareholders’ Agreement (see below). The intention is to see that the parties agree to the conditions of financial investment before signing a longer and a cumbersome contract.
The document should cover the terms relating to funding, corporate governance, and liquidation.
Share Subscription and Shareholders’ Agreement (SSHA)
This is the most important document in any seed finance. It clearly lays down the rights of the Investors as per the shares issued to them. Some of the important provisions of SSHA are:
Capitalization Table: Known as “Cap Table” in short, this should provide for the number of shares being issued, issue price, and the percentage of holding. This is the heart of the entire seed funding process and is indispensable.
Transfer Restrictions: Transfer restriction provisions like right of first refusal, right of first offer, pre-emptive rights, etc. that the investors and the promotors would want to have are covered in these provisions. These provisions ensure that the existing shareholders have the right to first buy the remaining shares and that equity of the company does not fall into the wrong hands.
Exit Rights: Investors want a good exit while getting involved in funding for startups, at a right price, and at the right time. Without this, they may not be very keen to invest in your start-up. Ensuring exit provisions are a must from the investors’ perspective.
For detailed provisions and clauses, you can also read this blog: Key clauses to include in a Shareholders agreement.
Amendment to Articles of Association (AOA) of the Company
Charter documents act as a constitution of any company. All rights and duties stem from here. If the provisions of SSHA are not included in the AOA, it may become difficult to enforce them. Hence it is a must to ensure that the important aspects of the SSHA are also captured in the AOA so that there’s no room left for any discrepancy.
Seed funding is beyond just having huge capital on your books of accounts. Ensuring that you raise funds without losing much hold over your company and having minimum intervention from the investors is the key to negotiating good SSHA with your investors.
These documents may differ based on your specific requirements while you seek funding for startups, which can be determined by a professional at LegalWiz.in. Once you’re ready to zoom towards the next stage of growth, get in touch with us and let us be your guide and enabler. Let’s grow your startup together!