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INDUSTRY NEWS
Brock Smith, Partner at Clark Wilson LLP asks us: "Is Your Company Ready to Raise Money?"
As an entrepreneur, you have struggled to get the attention of investors and finally convinced them to support your “world-changing” concept. With each meeting and draft of the term sheet, you become more firmly fixed on the future. But did you know that your chances of getting the financing you need depend almost as much on the past as the future?
Many potential financing deals have been delayed or collapsed altogether because the company failed to appreciate the need to get its legal affairs in order before signing a term sheet with an investor. The most common problems companies encounter, and the steps you can take to prevent them, are set out below:
- Failing to Document IP Ownership: As part of its due diligence process, your potential investor will want confirmation that your company owns and has the right to commercialize its intellectual property assets. You will need to supply fully signed copies of well-written non-disclosure agreements, contracts with employees and independent contractors regarding the ownership of inventions and work product and contracts with key suppliers or joint venture partners.
- Failing to Comply with Corporate and Securities Laws: Most entrepreneurs have an inaccurate or incomplete understanding of how corporate and securities laws apply to their company and to their shareholders. As a result, when issuing shares to founders and early stage (“family and friends”) investors, many companies fail to comply strictly with those laws.
- Failing to Maintain Your Corporate Records: It is critical that your company have a well-maintained and complete set of corporate records. Those records include lists of the shareholders and directors, copies of minutes of meetings and signed resolutions of the directors and shareholders. Your potential investor will want to review those records as part of its due diligence process in order to understand the history of your company.
For most companies, these problems arise as result of cutting a few corners during the early stages in order to save a few dollars on their legal bills. Entrepreneurs either try to “play lawyer” themselves or skip the process entirely. However, these strategies almost always fail in the long term because those companies find that they need to resolve these problems and prepare the required documents in a hurry in order to complete their financing. Resolving your problems in this fashion will not only distract you from closing the investment transaction, it will increase your transaction costs.
If you make the effort to address these matters before you sign the term sheet, then you can focus your energies on closing your financing. You will also project to your investors an image of someone who understands the need for strategic legal advice at the right point in a transaction; and in a business where the people involved in a company can be the deciding factor in whether an investor wants to make an investment, that’s a good thing.
Brock Smith is a Partner in the Technology and Intellectual Property Group at Clark Wilson LLP in Vancouver, British Columbia. He can be reached at bhs@cwilson.com or 604.643.3186.
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