Tools of the trade

Exploring the legal terms & structure

Having worked through the last chapters, you now have a clear(er) picture of the cornerstones of your future financing structures, have defined the relevant numbers, dates and principles, dos and don’ts for the investment you are looking for. 

If you’re still uncertain, we recommend revisiting the chapters "Understanding Deep Dive" and "Understand Your Situation." If you feel confident in answering these questions, great! Because now it is time to deal with the legal structuring of your finance scenario: Which instruments to use, which structural and technical questions to consider, what to talk about with lawyers and tax experts, which legal documents will be necessary, and so on.

This chapter helps you to get prepared for your conversations with lawyers and tax experts to design your financial instruments. Familiarize yourself with existing exemplary term sheets, contracts and statutes to get inspiration – but ensure that you build something that fits your individual situation and is appropriate for the legal system you are operating in. 

This will probably be the phase in which you get into contact with external experts – meaning legal costs.

Different companies proceed in a different order when selecting financial instruments and drawing up term sheets, contracts and shareholders' agreements. Where some present investors with close to finalized term sheets and maybe even first drafts of contracts, others co-develop everything with their investors. There are pros and cons for either path (more on this in the fundraising section).

However, you should be familiar with the technical considerations that come into play for choosing a financial instrument. An early (lawyer-approved) draft of a term sheet and/or letter of intent (LOI) outlining key determinants and conditions of your proposed investment can definitely be beneficial not only to get into contact with investors but also to have a very clear picture of the conditions you are looking for – and have them checked as to whether there are legal no go’s in there. 

This chapter also gives some thoughts and examples on statutes and contracts but note that those are often only developed after investors commit to funding so as to limit premature legal costs. At the very least be checked and adapted by investors and their respective law and tax experts.

By the end of this chapter, you'll have practical examples and reference materials to help shape these important conversations about your financing structure.