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Successful fundraising for start-ups: A legal checklist

17 Jan 2023

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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