Funding Rounds: deciphering the documentation

Introduction

Going through a funding round can be an exciting, but overwhelming, process. And that’s not helped by the amount of paperwork that’s involved. We often get asked by founders about which documents we produce and what each of them does during a funding round. So, if you’ve ever wondered that too, here we explain them all.

We’ll start by looking at the list of exhaustive documentation we produce to support founders in their first funding round. Then we’ll walk you through the documents used in each of the other round types offered on FounderCatalyst.

Contents:

Onboarding Investors
The Key Documents
Supporting Documents
Post Investment
Other Round Types

Onboarding Investors

We have three documents that are used to ‘onboard’ investors. By onboard, we mean: to ensure that you are covering your legal bases and not exposing yourself or the company to unnecessary risk.

Non-Disclosure Agreement (NDA): This document, also sometimes referred to as a confidentiality agreement, ensures that any information you share with potential investors is kept confidential. It is important to note that the NDA we offer is two way, which means you also have a confidentiality obligation to your investors, just in case they share anything confidential with you too.
FCA Investor Certificate: To ensure that you comply with Financial Conduct Authority (FCA) rules (as defined in the Financial Services and Markets Act 2000 (FSMA)), we’ll ask your investors to sign a consent, by which they’ll declare that they are eligible to invest in your company. If they don’t fall into any of the categories, you shouldn’t accept their investment. You are under no obligation to validate their consent.
Term Sheet: This document summarises the key commercial and legal aspects of the proposed deal. It’s (mostly) non-binding on both founders and investors – which means that you aren’t obliged to take the pledged investment, even though you have signed the term sheet. Similarly, your potential investor is under no obligation, either. Even though the term sheet isn’t legally binding, by signing the document both parties have created an ‘anchor’ – meaning it should be really hard to negotiate a significantly different position later on a point that they’ve already agreed.

The Key Documents

The following documents are the most likely to be scrutinised and negotiated by potential investors. Hopefully the significant items will already have been settled during any negotiation of the term sheet.

Subscription and Shareholders' Agreement (SSA): This is the principal contractual document, also known as an investment agreement. The agreement will be made between: the investors, any existing shareholders, the company’s management team and the company. It records the commercial terms of the arrangement between the parties and will include specific details of the investment round, including the number and class of shares to be subscribed for by the investors, payment terms and warranties about the condition of the company.
Articles of Association: these form part of the company’s constitution and as such govern the internal management of the company’s affairs. They will be subject to requirements of the Companies Act 2006 (the "2006 Act"). The Articles document the rules by which a company is governed, including the powers and responsibilities of the board of directors, the process by which shares are issued or transferred and so on.
Disclosure Letter: The warranties, which are contained in a schedule of the SSA, will be qualified by the terms of the disclosure letter, which may refer to supporting documents and will specifically set out any issues that the management and the company think the investors should know about, prior to completion of the investment.
Founder Service Agreement: This is an employment contract, setting out the terms under which each founder is employed by the company.
IP Assignment: A letter confirming that specific intellectual property rights have been assigned from the founding team into the company.

Supporting Documents

These documents authorise the allotment of new shares, adoption of the new articles of association (as applicable) and similar items:

Board Minutes: These record the items discussed and resolved at the board meeting required under the 2006 Act to authorise all of the required items.
Shareholder Resolutions: This document provides shareholder authority to the Board to issue the new shares under UK company law. It also waives the existing shareholders’ pre-emption rights - more on this below. These resolutions need to be signed by the holders of at least 75% of the voting shares in your company. The platform produces this document for you and messages all existing shareholders asking them to sign.

Post Round

Finally, the round closes and we produce one final document type:

Share Certificate(s): Each investor in the funding round is issued a share certificate detailing the particulars of the subscribed shares, such as how many shares, the share class, dates etc. Sometimes we will issue more than one share certificate for a single investor if, for example, they are subscribing for both SEIS and EIS shares, or if they subscribe for shares of different classes.

Post Investment

Don’t forget, there are also additional post-completion formalities founder(s) need to undertake.

Other Round Types

When you undertake a first funding round on FounderCatalyst, we issue all the documents detailed previously in this article. This ensures that all legal elements investors will expect to see are present and correct.

When you go on to undertake further funding rounds, you have a number of options as detailed below.

In any event, we onboard potential investors in the same way (NDA, FCA Investor Certificate and Term Sheet). We'll always issue share certificates, too.

In two out of three cases it will be necessary to seek board and shareholder approval and, if appropriate, investor consents and we'll manage those for you too.

Same Terms

You've already got a full set of documentation, so if investors are to join your Cap Table on the same terms then this is the right option.

Investors get onboarded as normal, but the only documents to be used within the round are:

Subscription and Adherence Agreement: this is a mini subscription and shareholders’ agreement that will sit alongside your existing SSA. It covers the mechanics of the issue of new shares, sets out certain conditions that need to be satisfied before the issue can take place (and which are all managed on the FounderCatalyst platform) and includes a set of “warranties” that will be given to the investors by the company and its founder(s) (in the same way that this happened under the original SSA).
Disclosure letter: This is the same document as mentioned previously, but updated for the most recent investors.

New Terms

This round type allows you to change the terms offered to your investors. It’s worth remembering that these changes will also impact existing investors, of course.

In this type of round, we don't replace your Founder Service Agreement(s) or IP Assignment(s), but we do produce new Articles and a new SSA. An updated disclosure letter will be produced, too.

Agile Round

This is also known as a 'rolling close' or 'additional new share' (ANS) round. To enable an agile round, you will need to specify this in either the initial funding round or New Terms round. This paperwork will authorise you to issue a certain number of shares, over a certain period, at a prescribed minimum price per share. For example, you might be authorised to issue up to 10,000 shares at a minimum share price of £10.80 per share for a period of 1 year, for a total further raise of up to £108,000.

An agile round allows you to continually add investment over a period, without having to undertake a full formal funding round. Your existing shareholders / investors approve your agile round when signing up to the previous SSA, which means the usual time-consuming hurdles (investor consents, shareholder resolutions and the pre-emption process) are all unnecessary.

An agile round consists simply of Board Minutes, and an Adherence Agreement signed by the investor alone for each investment.