Documents Required for Startup Financing

Setting up a startup company can require a lot of paperwork. It is common for startup founders to spend a lot of their time and effort putting these papers in order. It may seem like a mundane chore and even counterproductive. However, the reality is that the company needs to have all its legal documents in place if they want to obtain any kind of funding in the future.

This article provides a list of documents that can be used by the founders as a checklist when they set up their business.

1. Incorporation Documents: When entrepreneurs begin a startup company, they often choose to create a limited liability company. This limited liability company comes into existence via a legal decree. This means that a legal procedure has to be performed. The end result of the legal procedure is that a certificate of incorporation is issued.

   This is the most fundamental document for any company. It contains details about the list of shareholders, the capital as well as the type of business which the company wants to perform. The certificate of incorporation is required to prove the existence of a company. Hence, the company cannot acquire a property in its name or even have a bank account in its name until the certificate of incorporation is not present. Now, this may seem like an operational decision but it can be financial.

   There are several states which offer tax breaks to companies that incorporate within their geographical boundaries. It is possible for a startup company to have a sustainable advantage over its competition based on where they incorporate.

2. Licenses and Permits: Once the company has been brought into legal existence, it may be required to apply for licenses and permits which are mandatory to conduct a business. These licenses may vary depending upon the type of business being conducted.

   There might be some preconditions that need to be fulfilled before a license is issued. The entrepreneurs need to ensure that they have sufficient knowledge about these preconditions. Also, they need to have the money and the knowledge about the application process.

3. Intellectual Property: Most of the startups being founded today have some kind of intellectual property. We live in an information age. Hence, startup companies commonly have some kind of intellectual property such as an algorithm, a patent, or such other assets.

   It is essential that the startup company has all the paperwork related to these assets in place before they make an attempt to pitch their idea to investors and other third parties. It is possible that they may face some competition due to intellectual property theft.

4. Budgets: Once all of the above points have been put in place, it is likely that the startup firm will start its day-to-day operations. Now, when a company begins its operations, it is quite likely that it may act inefficiently and end up spending more money. In order to prevent this, a company needs to have a written budget in place. A budget is important since it helps the organization control all the costs. However, when a company begins operations, it may soon realize that its budget needs to be updated. This must be done regularly to provide a realistic cash-flow picture to the founders.

5. Projected Financial Statements: When the company starts its operations and builds up some kind of momentum, the next step is to obtain funding from investors. In order to do this, they will have to create a set of projected profit and loss statements, balance sheet, and cash flow statements. Some more financial statements may be required depending upon the nature of the business which is being conducted.

   These statements will be used by the investors to calculate the burn rate and other metrics which are considered to be key while financing a startup. It is important that the entrepreneurs have several versions of financial statements which can be presented to the investors so that they have an idea about the various possibilities.

6. Stock Purchase Agreement: The Company also needs to have a stock purchase agreement handy. This is because, in the initial days, the founders are trying to sell stock in lieu of capital. Hence, they should have some idea about the terms and conditions on which they are willing to offer these shares. They should have a document that explains details such as voting rights, exit procedures, etc. This document is generally used as a draft. The final stock purchase agreement is always prepared in consultation with the investor and it is common to make certain modifications.

7. Disclosures: The company as well as the founders also need to have a list of disclosures in place before they start raising funds for their company. This is because of the fact that investors have a right to know about any significant issues. For instance, the investors need to know if the company is facing any major lawsuits or whether it holds a large portion of its reserves in cryptocurrency.

Hence, we can say that fundraising ideally requires a lot of documentation. It is common for companies to create a file with the relevant documents which is then presented to prospective investors along with a business plan. The above-mentioned documents are essential in such a folder.