Angel funding is not as simple as it seems: legal issues
When I just started Sadko Mobile, I thought that to deal with my investors, all I need is a sample convertible note template from http://docstock.com My bank, however, persuaded me to hire a law firm. It is not as awful as it sounds. Established law firms can offer you a deal to give you some free service (usually $15K) in exchange for a warrant to buy some shares or simply for a promise to pay once you get revenues or venture funding. A very good deal.
Docstock is a great site, however now I understand that it has its own limitations. You need to really understand the legal process side of financing to pick the right documents there. If I just took a template without knowing what other documents must accompany it, I could have been in trouble. The stack of document, I have now includes in addition to regular incorporation documents (bylaws, incorporation certificate and tax id application):
- Convertible note
- Convertible note purchase agreement
- Board action authorizing the company to issue a note
- IRS forms for investors to confirm they are accredited
This all you need to have to properly close the angel financing. What are the risk if you do it improperly at start? The least is that you will spend several more weeks or months in due diligence doing housekeeping. The worse - the venture funds will see the legal mess you created and pull back the term sheet, and you will be left with good company but without investors, left to die in the cold. And the worst (God forbid), someone will sue you.
Plus, there is a document called “Founders’ stock purchase agreement” also full of uncommon things, and “Indemnification agreement” that is fairly much beyond human comprehension. More in some other post.