Raising capital for the first time can feel overwhelming. You’re stepping into a world of term sheets, cap tables, investor negotiations, and legal documents — all while trying to grow your business.
We’re not lawyers, and this isn’t legal advice — just a practical overview of what many founders wish they’d known before they raised investment. Think of this guide as a collection of ideas, best practices, and key questions to help you prepare for investor conversations, understand your options, and avoid common mistakes.
The good news? With the right preparation, you can not only attract the right investors but also retain control and build a long-term foundation for success.
This guide walks you through the essential building blocks to becoming “investment ready” — from share structures and legal documents to protecting your control and setting up your team for long-term growth.
Legal Protections and Founder Control
Many founders give up more than they realise in their first capital raise — not just equity, but control. Here’s how to protect yourself:
- Get legal advice before signing anything. Term sheets and shareholder agreements often contain terms (like “bad leaver” provisions or board control rights) that can work against you if not carefully negotiated.
- Avoid vague or unfair leaver provisions. “Bad leaver” clauses can result in you being forced to sell your shares — sometimes at nominal value — if you resign or are terminated.
- Understand board vs. shareholder control. Directors vote on most company decisions, and each director usually gets one vote — regardless of how many shares they own. Giving away board seats can dilute your power even if you still own a majority of the company.
- Protect your board position. Bake in rights that allow founders to remain on the board or appoint a majority of board members where possible.
These risks are more common than many founders realise. Without well-drafted documents and early legal guidance, clauses like bad leaver provisions or board seat arrangements can lead to unexpected loss of control—even while holding majority ownership. A deeper look at these issues is outlined in Osborne Clarke’s guide, which explains how founders can protect their position by carefully negotiating the structure and terms of early investment agreements.
Share Types and How They Affect Control
Not all shares are created equal. When offering equity to investors, be intentional about the kind of shares you issue.
- Non-voting shares: Ideal for reducing investor influence, but rarely accepted by venture capitalists.
- Ordinary shares: Basic share class with equal rights — often used by founders.
- Preference shares: Come with rights such as:
- Dividend preference: First to receive profits when distributed.
- Liquidation preference: Paid out first if the company is sold or liquidated.
If you’re unsure which type of shares to offer, it’s essential to understand how these choices impact both investor expectations and your long-term control. Preference shares, for example, can come with significant financial rights that appeal to investors, but it’s the voting rights that will ultimately influence who steers the company.
For a practical breakdown of how different share classes affect ownership and decision-making, this SeedLegals overview offers clear guidance on structuring equity in a way that aligns with both growth and governance.
Tip: From a control perspective, voting rights matter more than dividend rights. Negotiate voting carefully.
Your Cap Table and Employee Share Schemes (ESOPs)
Your cap table is a snapshot of your company’s ownership — and it’s one of the first things an investor will scrutinise.
What to Include:
- All shareholders, including founders, early investors, and co-founders.
- Any outstanding convertible notes or SAFEs.
- An employee option pool, typically 10–20% of equity, even if not yet allocated.
Why ESOPs Matter:
If you’re planning to attract or retain talent with equity, you’ll need a structured Employee Share Option Scheme (ESOP).
To set up an ESOP:
- Draft plan rules and individual option agreements.
- If you’re in the UK, apply to HMRC for a valuation (e.g. under the EMI scheme) to ensure employees receive tax-efficient options.
Establishing a clear and well-structured cap table, along with a thoughtfully designed ESOP, is crucial for aligning the interests of your team and potential investors. A comprehensive guide to setting up employee share schemes, including the various types available in the UK and their tax implications, can be found in this Global Shares article. This resource provides valuable insights into how to effectively implement share schemes that benefit both your company and its employees.
Legal Documents You’ll Need for a Capital Raise
Getting legally prepared is critical. These are the foundational documents you’ll need:
- Term Sheet: A non-binding document that outlines the deal’s key terms (valuation, round size, investor rights). Helps avoid misunderstandings later.
- Subscription Agreement: The binding contract where the investor agrees to purchase shares. It should include:
- Investment amount
- Share price (calculated using valuation ÷ fully diluted shares)
- Conditions to complete the investment
- Shareholders’ Agreement: Governs shareholder rights and obligations, covering board control, share transfers, voting rights, and dispute resolution.
- Articles of Association: The company’s constitution — often amended to reflect new investor rights.
- IP Assignment Agreements: Ensure the company (not individual employees or contractors) owns the intellectual property.
For a comprehensive overview of these essential documents, including detailed explanations and practical guidance, you can refer to this informative article on Antler’s Academy.
Investor-Friendly Contracts and Compliance
Investors will want to ensure that your business is legally sound. That means having the right paperwork in place:
Must-haves:
- Client contracts: Clearly define services, limit liability, and include robust payment terms.
- Supplier contracts: Should include warranties, delivery terms, and protections for your business.
- NDAs or confidentiality clauses: Essential when sharing sensitive information.
- Employment contracts: Ensure compliance with wage laws, pension schemes, and holiday entitlements.
Ensuring your business has these fundamental contracts in place not only protects your operations but also instills confidence in potential investors. A comprehensive overview of essential contracts—such as employment agreements, terms and conditions, and NDAs—can be found in LawBite’s guide to essential contracts, which outlines how these documents safeguard your business and facilitate smoother investor relations.
Here are the tools every first-time founder should consider using:
- Cap Table Template with an Option Pool built in
- Term Sheet Checklist
- Shareholders’ Agreement Key Terms Guide
- Sample Friends & Family Loan Agreement
- IP Assignment Clause Examples
- EMI/ESOP Setup Guide (UK-specific)
💡 Pro Tip: Even if you’re raising from friends or family, put everything in writing. Clarity protects relationships and your business.
