The moment everything becomes formal

For many founders, raising investment marks the first time their business is subject to serious legal scrutiny. Investors conduct due diligence. Documents are negotiated. Terms are set that will govern the relationship for years.

It is also the moment when legal advice matters most — and when founders are most likely to skip it in the excitement of closing a deal.

Understanding the term sheet

A term sheet is a non-binding document that outlines the key commercial terms of an investment. It covers the valuation, the amount being invested, the type of shares being issued, and the governance rights the investor will receive.

Term sheets are drafted by investors and almost always favour the investor. That doesn't mean they are unfair — it means they reflect the investor's standard position, which is a starting point for negotiation, not a final offer.

Before you sign a term sheet, have it reviewed. The commercial terms set here will shape every subsequent document in the transaction.

Liquidation preferences

One of the most consequential — and least understood — clauses in an investment document is the liquidation preference. This determines the order in which proceeds are distributed if the company is sold or wound up.

A 1x non-participating preference means the investor receives their money back before other shareholders, but participates in the remaining proceeds alongside founders. A participating preference means the investor receives their money back and then shares in the remaining proceeds — which can significantly dilute a founder's return in a modest exit.

Understanding what you are agreeing to here is not optional. The difference between preference structures can mean the difference between a meaningful outcome for founders and a disappointing one.

Anti-dilution provisions

Anti-dilution clauses protect investors if the company raises money at a lower valuation in the future — a down round. In practice, these clauses can significantly increase the number of shares an investor holds without them investing additional capital.

Broad-based weighted average anti-dilution is generally considered founder-friendly. Full ratchet anti-dilution is not. Know which one you are agreeing to.

Board composition and control

Investment documents typically give investors the right to appoint one or more directors to the board. This is standard and generally reasonable. What matters is the balance — who controls the board, what decisions require investor consent, and what veto rights the investor holds over key business decisions.

Pay particular attention to reserved matters — the list of actions that require investor approval. This list can be short and reasonable, or it can be so extensive that it limits your ability to run the business without constant investor sign-off.

Due diligence — what investors will find

Before closing an investment, investors will conduct legal due diligence. They will review your contracts, your intellectual property ownership, your employment arrangements, your cap table, and your corporate structure.

If there are issues — missing contracts, IP ownership disputes, employee misclassification — they will surface here. Addressing these issues before you begin a fundraise is significantly easier and less expensive than addressing them under the pressure of a transaction.

The bottom line

Raising investment is not just a commercial event — it is a legal one. The documents you sign will govern your relationship with your investors for as long as they are shareholders. Getting proper legal advice at this stage is not a cost. It is an investment in your own position.