Successful fundraising for start-ups: A legal checklist

By Gautam Singh (Partner), Mitali Halbe and Nandita Bhakta (Senior Associates), and Pratibha Sharma (Senior Executive)

This article was first published in Bar and Bench

The Indian start-up eco-system is dynamic and has evolved over the last few years, giving rise to several creative and commercial business models. However, this year has been a testing time for the start-up space, which is striving to overcome the repercussions of the COVID-19 pandemic.

A report by YourStory states that the funding ecosystem is gradually improving, with start-ups raising close to USD 1.4 billion in November 2022, an 18.1% month-on-month increase in comparison to October.

Be it comprehending different mechanisms to raise capital or identifying the benefits and loopholes of those methods, in such a precarious situation, start-ups must be circumspect in their funding strategy to avoid legal and business challenges at various stages of the funding lifecycle.

Overview: Legal challenges involved in different stages of fundraising

• Pre-seed – This stage marks the commencement of the start-up lifecycle, where the product is under development and testing. Friends, family and angel investors are typical investors at this stage. Given that this is mainly a ‘friends and family’ round, founders may be inclined to avoid seeking proper legal advice in order to save costs. This approach may be risky for the company/founders, especially if a subscription or shareholders’ agreement (or similar document) is proposed to be signed for the pre-seed investment. Money matters often turn friends and family into tough negotiators and roadblocks in the start-up world. To ring-fence this risk, the start-up and founders should enter into a detailed term sheet to legislate the rights and obligations of the respective parties.

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