10 Legal Hurdles You Have to Tackle After Raising Your Series A Round
Raising a Series A round is a significant milestone for any startup. It's a sign of confidence from investors and a testament to your business's potential. However, with this achievement comes a host of new responsibilities and challenges. From now on you have to prove that you can scale quickly and achieve the next milestones on your journey to Series B and beyond. This includes legal challenges which will cross your way many times. As you are growing, the business is becoming more complex in general and you also need to create a more mature company. Navigating these legal waters effectively is crucial for maintaining your momentum and setting the stage for future success. In this article, we'll explore 10 key legal hurdles that your company should address after securing Series A funding.
1. Implement Your New Corporate Governance and Comply With It
The influx of Series A funding usually brings changes in your corporate governance. New investors typically seek representation on the board and you negotiated a complete new set of reporting obligations and consent requirements. Now it's crucial to not only implement these changes but also to ensure compliance with the new governance framework. If you don't comply with your articles of association or shareholders' agreement you might even create a bad leaver event!
The things to look out for now involve:
- Organize your new board: You should agree on the times of the board meetings for the next 12 months inline with your shareholders' agreement, typically this means setting a quarterly meeting. In your first board meeting you should discuss the structure of future board packs and standard investor specific agenda items.
- Review your consent requirements with the management team: All members of the management team should be aware of consent requirements with respect to decision making. Complying with consent requirements is absolutely crucial and you should make sure, that no contracts are signed and decisions are made without the necessary approvals. It makes sense to implement a governance tool to manage shareholder and board resolutions from now on.
- Set up new Investor reporting: In your shareholders' agreement you agreed on reporting obligations towards your shareholders. You should start right away and prepare your new standard reporting package.
2. Discuss Legal Due Diligence Findings and Tackle These
During the Series A funding process, investors usually conduct thorough legal due diligence on your company. This process might have been a bit scary prior to signing but now you and your company can really benefit from it. The legal due diligence often uncovers areas needing legal attention, ranging from contract irregularities to compliance issues. Addressing these findings is crucial for mitigating risks and solidifying investor trust.
- Ask your investors for due diligence findings: Talk to the lead investor and ask about findings in the due diligence process you are not already aware of. This shows that you are managing your company professionally and gives you a chance to mitigate risks.
- Renegotiate contracts were needed: Many times investors find risks within contracts you previously signed. Review those contracts and try to renegotiate were needed.
- Enhancing compliance measures: Now its time to implement robust compliance measures to rectify any regulatory shortcomings identified.
3. Grow Your Team in Compliance with Employment Law
You finally got the money you desperately needed to grow your team. Now its important to do so in compliance with employment law and set the right contractual structures to hire quickly. This involves:
- Developing comprehensive employment agreements: Get templates for different types of employment relationships (fixed term, part-term, freelancer agreements, working student contracts)
- Think about your first policies: With a small team workplace policies were not so important. This changes as you grow. Set-up homeoffice and remote work policies and make sure that employees comply with data privacy laws and other important security measures.
4. Check If You Have the Right Incentive Structures in Place
Incentives are key to attracting and retaining top talent. Post-Series A, reassess your incentive structures to ensure they align with your growth objectives and are competitive in the market. This includes:
- Equity compensation plans: Reviewing and potentially restructuring stock option plans to balance employee motivation with shareholder interests. If you are a German company think about if now is the right time to invest in setting up the new tax beneficial EIP structure. You can find more about it here.
- Salary Structure: Now is the right time to plan a proper salary structure and set ranges for different kind of roles (for example: junior, mid-level and senior developers etc.)
5. Make a Contract Review with Respect to Your Monetization Plans
Post-Series A funding is an ideal time to revisit and realign your contracts in line with your monetization strategy. This is a crucial step to ensure that all agreements support and do not hinder your business model.Key areas to focus on include:
- Customer and vendor agreements: Review these contracts for terms that could impact revenue recognition, service levels, and liability
- Licensing agreements: If your business relies on intellectual property, ensure that your licensing agreements are optimized for revenue generation and protection of your assets.
- Partnership agreements: Align partnerships with your monetization goals, ensuring mutual benefit and legal compliance.
6. Set Up the Necessary Legal Tools to Ensure You Can Scale Quickly
Scaling a business requires not just financial capital but also a solid legal foundation. Implementing the right legal tools and processes is essential for smooth scaling. This includes:
- Automating legal processes: Implement tools for contract management, compliance tracking, and legal document automation.
- Creating scalable legal frameworks: Develop legal templates and frameworks that can easily be adapted as your business grows.
- Risk management strategies: Establish clear procedures for identifying, managing, and mitigating legal risks in a scalable manner.
7. Decide if It Is the Right Time to Hire Your First Legal Team Member
As your startup grows, so does the complexity and volume of legal work. Consider whether it's time to bring on a dedicated legal professional. This decision depends on factors like:
- Volume and complexity of legal work: Assess if the current workload justifies a full-time legal hire.
- Cost-benefit analysis: Compare the cost of hiring an in-house lawyer versus outsourcing legal tasks.
- Strategic importance of legal issues: If legal matters are central to your business strategy, having in-house expertise may be crucial.
8. Check Your Intellectual Property Protection
Intellectual property (IP) can be a startup's most valuable asset. Post-Series A, it's critical to ensure that all IP is adequately protected. This involves:
- Conducting an IP audit: Identify all IP assets and ensure they are properly protected (patents, trademarks, copyrights).
- Securing IP rights: If there are gaps in protection, take immediate steps to secure these rights.
- IP strategy alignment: Ensure that your IP strategy aligns with your business goals and enhances your competitive advantage.
9. Data Privacy and Security Laws
In an era where data is king, complying with data privacy and security laws is non-negotiable. This is especially crucial if your business handles sensitive customer data. Key steps include:
- Understanding applicable laws: Be aware of all data protection laws relevant to your markets, such as GDPR in Europe.
- Implementing data protection measures: Establish robust data security protocols and privacy policies.Regular audits and updates: Continuously monitor and update your data protection measures to ensure ongoing compliance.
10. Prepare for Your Next Financing: Now!
Finally, while it might seem premature, start preparing for your next round of financing immediately. This includes to store all legal documents in a proper data-room setup, manage your cap table properly and always be prepared to have your next financing conversations.