VC Fund Raising Manual – 8 Legal Work

You did it, you signed a term sheet with a VC. What will happen now is that the VC firm will do some final due diligence, and you will start to put into legal form what you have agreed in the term sheet.

This article is part of the a series, you can find the index here.

Here is what should happen now:

- Accounting due diligence

- Legal due diligence

- Drawing up the investment agreement and amendments to your company’s articles of association (called differently in different countries)

What should NOT happen (in a VC deal, buyouts are different):

- Further commercial due diligence

- Further references on founders

- Further technical due diligence

- Any other funny stuff

The work items directly above should have been completed before you signed the term sheet. I suggest you do not sign a term sheet before they are complete. Again this is true for VC deals, in buyout deals, the deal process is slightly different.

A quick word on drawing up the legal documents. What frequently happens is that the VC will use and amend some sort of ‘standard’ document that they use all the time. This standard document can, for example, be based on suggested documents drawn up by a venture capital association. The VC will tell you these documents are totally ‘standard’. My thoughts on this are as follows:

- Documents drawn up by bodies that represent VCs are not unbiased. They are in favor of the VC firm.

- Standard documents are usually the very long versions. There will be a lot of paragraphs in here you can do with out.

- Any contract is a commercial agreement before it is a legal agreement. The legal form and language are there to serve a commercial purpose, not the other way round. Discuss the commercial aspects with the VC directly, not via the lawyer, and come to an agreement. Then instruct your lawyers to put that in legal wording. Use your lawyer effectively.

Expect this process to take some 4-8 weeks. If everything goes well, then you are ready for the final stage: getting the money in the bank.

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