Raising capital is an exciting step for any founder in the growth and hyper growth phases of your startup journey. Whether you’re at pre-seed, seed, Series A stage or beyond, the core documents you’ll need remain fairly consistent across all rounds. While the content may evolve—such as increasing investor rights as rounds progress or heightened founder protections when shareholdings dip below 50%—the essential documents stay the same. When raising a round with external institutional investors especially, these documents are of central importance: the subscription agreement, shareholders agreement, articles of association and cap table.

In this guide, we’ll delve into more detail on these key documents, what they are, what they cover and what to look out for from our experience with clients.

Key Documents in a VC Round

The primary documents you’ll need without fail during any VC round include the subscription agreement, shareholders agreement, articles of association, and the cap table. These documents are often based on the British Venture Capital Association (BVCA) standard documents, which you can find here. Having at least a high level understanding of these documents is important for ensuring a smooth investment process and safeguarding both your interests and those of your investors.

1. Subscription Agreement

What It Is

The subscription agreement is a legal document between your company and the investor(s) that details the specifics of the investment being made into your company. It covers the amount of capital being invested, the number of shares the investor will receive in return, and various warranties (i.e. promises) provided by the company and sometimes the founders. These warranties are assurances that there are no hidden issues within the company that could negatively impact the investment, such as undisclosed legal disputes, unaddressed financial liabilities, or unresolved intellectual property claims.

Key Things It Covers

• Investment Amount and Shares: This section specifies the exact amount of money being invested and the corresponding number of shares that will be issued to the investor. This ensures clarity and precision about what the investor is getting in return for their investment.

• Warranties: These are promises made by the company about its current state and operations. Warranties might cover the accuracy of financial statements, ownership of intellectual property, compliance with laws, and the absence of ongoing legal disputes. They provide investors with a level of confidence that they are not stepping into a problematic situation.

Key Things to Look Out For

• Accuracy: Double-check that the investment amount and the number of shares are correct and reflect the latest agreements and cap table. Any discrepancies here can lead to significant issues later on. Remember, we often hear about equity percentages in startups, but that these percentages always relate to an actual number of shares on the cap table.

• Warranties: Review all warranties to ensure they are accurate and can be substantiated. If there are any exceptions or issues that do not align with the warranties, these should be clearly disclosed in a separate disclosure letter. This transparency helps in avoiding future disputes and legal complications.

Understanding and meticulously reviewing the subscription agreement is crucial for both protecting your interests and building a solid foundation of trust with your investors. This document sets the stage for the entire investment relationship, making it essential to get it right from the start.

2. Shareholders Agreement

What It Is

The shareholders agreement is a contract between the company, and each of its shareholders, including the founders and all investors, defines how the company’s shares will be managed and outlines the governance of the company from the moment of the investment onwards. It provides a framework for the relationship between the company’s shareholders, detailing their rights and responsibilities. This agreement is crucial in ensuring that both founders and investors have a clear understanding of how the company will be run, how decisions will be made, and how shares can be transferred or sold in future.

Key Things It Covers

• Share Treatment: The agreement outlines the rules and procedures for issuing new shares, transferring existing shares, and handling the sale of shares. It ensures that all shareholders understand their rights regarding share ownership and the processes involved in any changes to shareholding. These rules will often also or alternatively be covered in the articles of association.

• Company Management: It details the governance structure of the company, including the roles and responsibilities of the board of directors and the management team. It specifies how decisions are made, how often meetings will be held, and how various aspects of the company’s operations will be managed. Again, the main substance of these rules may also or alternatively be covered in the articles of association.

• Investor Protections: Specific clauses are included to protect the interests of investors. These protections might include rights to financial information, voting rights, veto powers over certain major decisions and specific commitments and restrictions on founders, such as non-compete restrictions. These provisions are designed to ensure that investors have a say in important matters affecting the company despite only being minority shareholders.

Key Things to Look Out For

• Balance of Control: It's vital to strike a balance between giving investors enough control to protect their investment and allowing founders the flexibility to manage the company effectively. Too much investor control can hinder the company's agility, while too little can make investors uneasy and result in a relationship imbalance.

• Consent Matters: This refers to the list of actions that require investor consent before they can be executed. Common consent matters include issuing new shares, taking on significant debt, and making major acquisitions or sales. Negotiating this list carefully is important to avoid unnecessary interference in day-to-day operations while still providing investors with a level of oversight on critical decisions.

• Board Composition: The composition of the board of directors should fairly represent both the founders and the investors. This typically includes agreeing on the number of seats each party controls and the process for appointing and removing directors. Ensuring a balanced board composition helps in making decisions that are in the best interest of the company as a whole.

The shareholders agreement is a foundational document that establishes the rules for how the company will be governed and how shareholder interactions will be managed following the investment. Careful attention to the details in this agreement helps prevent conflicts and ensures a smooth operational and strategic alignment between founders and investors.

3. Articles of Association

What It Is

The articles of association serve as the company's constitution, providing the fundamental framework for how the company operates, including the treatment of shares and overall management. It is not a signed contract, but a document that is adopted and approved by the company’s board of directors and shareholders. While in some angel rounds, key points from the articles may be incorporated into the shareholders agreement to simplify matters, in a standard VC round, it is common to have separate, detailed articles of association. This document is legally binding and essential for ensuring that the company operates smoothly and in accordance with agreed principles.

Key Things It Covers

• Founder Leavers and Vesting: This section defines the rules regarding what happens when a founder leaves the company. It includes vesting schedules for founders’ shares, which typically means that founders earn their shares over a period of time. This is designed to ensure that founders remain committed to the company, and that if they don’t, the shares will be available for reallocation to replacements.

• Share Transfers and Issuances: This part outlines the procedures for issuing new shares and transferring existing shares. It includes rules for pre-emption rights, which give existing shareholders the right to purchase new shares before they are offered to outsiders, drag-along rights which enables the company to force a minority of shareholders to participate in an exit, tag-along rights which ensures a minority of shareholders cannot be excluded in an exit, and other mechanisms to control the dilution of ownership.

• Director Appointments: This section establishes the rules for appointing and removing directors. It defines how many directors the company will have, the process for their appointment, and the circumstances under which they can be removed.

• Meeting Protocols: This includes the procedures for holding board and shareholder meetings, such as the frequency of meetings, notice periods required, quorum for decision-making, and how resolutions are passed.

Key Things to Look Out For

• Leaver and Vesting Clauses: These clauses can have a significant impact on founders. Ensure that the vesting schedule is fair and aligns with your commitment to the company. Pay attention to the conditions under which shares are forfeited or accelerated in the event of a founder's departure. See our article on good and bad leavers for more information.

• Transfer Rules: The rules for transferring shares should be clear and reflect your long-term vision for the company, including if planning for a future exit (which is generally always the case with VC investments). This includes ensuring that pre-emption rights, drag-along rights and other transfer rules and restrictions protect the company and its shareholders while allowing for flexibility as the company grows.

• Director Rules: Understand the implications of the rules for appointing and removing directors. This includes how director appointments can affect control over the company and the balance of power between founders and investors. Ensure that these rules allow for effective governance without compromising the founders' ability to steer the company.

The articles of association are a critical document that lays down the foundational rules for the company's operations and governance. By carefully reviewing and negotiating the terms within this document, founders can ensure that their interests are protected while establishing a robust framework for the company's growth and management.

4. Cap Table

What It Is

The cap table (capitalisation table), is a dynamic record that details the ownership structure of a company. Typically maintained in an Excel or Google sheet, it tracks the issuance and transfer of shares, the allocation of option pools, and the dilution effects of new share issuances. The cap table provides a clear picture of who owns what shares and percentage of the company at any given time and is crucial for managing equity and ownership stakes, especially during funding rounds.

Key Things It Covers

• Share Issuances and Transfers: The cap table meticulously records all transactions involving shares, including new issuances, transfers, and cancellations. This ensures that the ownership structure is always up-to-date and accurately reflects the current state of equity distribution.

• Option Pools: The cap table includes details of option pools, which are shares set aside for future issuance, typically as stock options for employees. These shares do not generally exist yet, but are included in the cap table at the time of the investment round so that when the shares are issued in future, they do not dilute the existing shareholdings. This helps in managing incentives and compensations while maintaining transparency about the availability and usage of these shares.

• Dilution: This section highlights the impact of new share issuances on the equity percentages of existing shareholders. It shows how each new round of funding or issuance of shares affects the ownership stakes of all shareholders, helping stakeholders understand the consequences of dilution.

Key Things to Look Out For

• Accuracy: It is critical to keep the cap table updated regularly to reflect all changes accurately. Inaccuracies can lead to misunderstandings and disputes, especially during funding rounds or exit events. Regular reviews and updates ensure that the data remains reliable.

• Option Pool Size: Ensure that the size of the option pool is correctly represented. During a VC round, investors often require that the option pool is at least 10% of the total shares and that it is accounted for in the pre-money valuation. This prevents investors from being diluted by the option pool after the investment.

• Dilution Impact: It is essential to understand how new investments and share issuances will affect your ownership percentage. Carefully model the effects of various funding scenarios on the cap table to anticipate and plan for dilution. This includes understanding both the immediate impact and the long-term implications for control and equity value.

The cap table is a vital tool for managing and visualising the equity structure of your company. By maintaining an accurate and detailed cap table, founders can ensure transparency, make informed decisions, and effectively manage relationships with investors and other stakeholders. Regular updates and careful monitoring of the cap table help in anticipating and mitigating potential issues related to equity and ownership. Speak to our team to understand how we can support with your ongoing cap table management.

Why These Documents Matter

Having these documents in place is critical for establishing a clear and legally sound foundation with your investors and shareholders generally (including founders). These documents are especially important if you are seeking investment from external institutional investors. They not only protect the investors but also safeguard the founders' interests, ensuring that everyone is on the same page regarding the management and future direction of the company:

• Investor Protection: Investors need assurance that their investment is secure and that they have a clear understanding of their rights and responsibilities. These documents provide the legal framework that outlines how the company will be managed, how shares will be treated, and what protections are in place for their investment.

• Founder Safeguards: For founders, these documents ensure that their interests are protected as the company grows and new investors come on board. They help maintain control over key decisions and set clear guidelines for resolving potential conflicts.

• Operational Clarity: Clear documentation helps avoid misunderstandings and disputes by setting out the rules and expectations for all parties involved. This clarity is crucial for smooth operations and effective governance.

Where Does Legal Support Come In?

Navigating a VC round involves intricate details and often complex negotiations. Seeking professional legal support is especially important when working with external institutional investors both for ensuring a strong legal foundation, but also to protect yourself as founders and the strategic direction of your company. Our fractional support model has worked well for founders across all VC rounds from pre-seed to series A and beyond.

We will generally support clients from the outset of a round, typically working with founders on strategic structuring of the round, modelling the cap table, prioritising key founder protections and setting a term sheet, even before the investment lineup is confirmed. This work helps focus minds, and will often make the latter stages and closing of a funding round more efficient in all respects.

Some of the benefits include:

• Risk Mitigation: Good legal advice can help identify and mitigate risks associated with the investment, including in terms of cap table dilution and founder protections.

• Experience: Working with advisors who have experience of these funding rounds means you can have a clear vision of what to prioritise and what really matters for founders in the short, long and medium term, therefore maximising value.

• Compliance: Ensuring compliance with relevant laws and regulations, especially around SEIS and EIS when dealing with SEIS and EIS funds, is important to ensure a smooth fundraising process without major issues arising at the final hurdles.

• Peace of Mind: Knowing that your legal interests are protected allows you to focus on running and growing your company. Legal counsel can provide the expertise needed to handle negotiations and document preparations, reducing the stress on the founders who still have businesses to run in the background.

Preparing for a VC round requires meticulous attention to documentation and a deep understanding of the key agreements involved. By familiarising yourself with the subscription agreement, shareholders agreement, articles of association, and cap table, and seeking expert legal advice, preferably from legal counsel with a special interest and experience with VC rounds and startups, you can navigate this challenging process more effectively.

Next Steps

• Familiarise Yourself: Understanding the purpose and details of each document helps you make informed decisions and negotiate better terms.

• Seek Expert Advice: Legal experts such as our team at Accelerate Law can provide invaluable guidance and ensure that your interests are protected throughout the process.

While securing funding is vital, maintaining the ability to manage and grow your company post-investment is equally important. With the right preparation and support, you can set the stage for successful growth and partnership with your investors.

Accelerate Law provides flexible strategic and legal support to startups end-to-end through angel investment rounds and VC funding rounds, which includes supporting with SEIS and EIS matters, flexible funding for example through Advanced Subscription Agreements, and drafting and negotiating investment terms from term sheets through to completion. Accelerate Law also specialise in EMI Schemes for startups. Contact us here to find out more.