You may have an exceptional and innovative idea for your startup, but it may never happen if you lack the necessary capital. Therefore, creating a strategy for approaching sources becomes crucial. The challenge of growing your company and getting the capital you need comes with equal amounts of excitement and threat.

Unless you have some supernatural abilities, it's unlikely to hook an investor initially. Two important elements when raising funds – are due diligence and proper structure. Some may expect a detailed plan of your business and its strategy, and some may even ask for sureties. Therefore, organizing your business documentation and other necessary documents for obtaining investment opportunities is the first step to raising capital.

By thoroughly understanding the startup financing system, it is important for every entrepreneur to determine what type of financing is best suited for the growth of their company.

Here's your guide to recognizing and understanding the documents most commonly used to raise capital and the investment agreements you may need to use when raising capital for your startup!

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1. Investment Agreement

An "Investment Agreement" is a legally binding document executed between the founders of the start-up and potential investors who want to buy shares in the business. The investors may be either new or current shareholders or external investors.

The agreement not only focuses on and defines the rights and obligations of the investors, but also imposes restrictions on the exercising of their powers.

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2. Shareholder Agreement

Shareholders are those who invest or have invested for a portion of ownership in a company in the form of shares. Approaching shareholders to make investments in your company can be a terrific strategy to raise money if you are a start-up. However, drafting a shareholder's agreement is essential if you want to safeguard your company, yourself, and your shareholders.

It is important to recognize that each agreement is tailored to meet the specific requirements of each company and its shareholders, without which one could sustain serious damage. The term "shareholders agreement" refers to an agreement concluded between company shareholders at the time of the investment or before. This agreement defines the rights and obligations that absolutely safeguard the company and the minority shareholders.

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3. Subscription Agreement

It is an agreement wherein the investors and business owners agree to buy and sell a set number of shares at a particular price. A company anticipates that the subscriber will purchase the agreed-upon quantity of shares at the predetermined price. In the early phases of funding, startups usually provide a subscription agreement.

A well-written subscription agreement, however, undoubtedly helps your company in avoiding future disputes if your startup company wishes to safeguard its legal rights with more established parties. The use of the subscription agreement is certainly influenced by a number of variables, such as the company's demands, its industry, its size, etc. Despite such factors, there are key details regarding the pre-agreed Return on Investment by new investors.

The specifics of the transaction, the number of shares being sold, and the price per share, as well as any legally binding confidentiality agreements and conditions, are frequently included in a properly-structured subscription agreement.

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4. Share Purchase Agreement

This is an agreement in which investors agree to purchase a certain number of shares of a company at a certain price under certain conditions. This is a more formal agreement than a subscription agreement because it requires investors and the company involved, to record their information. A subscription agreement is more subtle in nature.

Many start-ups do not understand the importance of drafting this agreement at an early stage. Since the possibility of this agreement is mainly found in closely held companies, it regulates the sale and transfer of shares of the company.

• The purpose of this agreement is to mutually agree on the terms and conditions of the agreement if the seller agrees to sell the mentioned number of shares at a certain price.
• It is an important business practice, as its absence can lead to unintended consequences.
• This agreement provides an opportunity to scrutinize every clause of the document as it covers a broad aspect of the transaction.

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5. Business Loan Agreement

An extremely well-known and easy way to raise money for any business is a business loan. This is an agreement where a startup borrows money from banks at a fixed interest rate. Depending on the potential of your startup, banks only receive interest instead of a percentage of profits or a share of the company. This can be a viable option as opposed to sharing a percentage of profits or company shares with investors. However, regardless of the success of your startup, you are obligated to repay the loan.

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6. Asset Purchase Agreement

Another important method of raising capital is the purchase of assets, where start-ups can finance themselves by selling some of their assets. An asset acquisition can involve the acquisition of some or all of a business's assets, which includes fixed assets such as buildings, equipment, or trading stock, as well as intangible assets such as intellectual property rights or business goodwill.

An asset purchase agreement is used to document the purchase and describes the terms and conditions relating to the sale and purchase of the assets of a business start-up.

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7. Venture Capital Agreement: Term Sheets

Venture capital enters start-ups where the venture capitalists see potential because equity financing used for small companies and start-ups accelerates the high growth and increases the need for substantial funding to sustain that growth. Venture capitalists often demand a seat on the startup's board in exchange for their investment.

If the start-ups are engaged in a risky enterprise where bank loans and other sorts of loans won't be qualified, then this type of resource usually proves to be beneficial. A select few of the most well-known and powerful companies, including Facebook, Amazon, and Apple, have received venture capital to grow.

The venture capitalist can be individuals, businesses, or any other type of financial institution that provides funding as well as strategic advice, and introductions to possible clients, business partners, and employees. Start-ups typically pitch to many venture capital firms. Getting the attention of local venture capitalists is simpler than contacting investors who are located elsewhere because most of them concentrate on a single geographic area.

After securing venture capital funding, a start-up must initially draft a "Term Sheet" and deliver it to the entrepreneur.

• It is a significant document that shows how serious venture capitalists are about making an investment, conducting due diligence, and putting together solid legal investment paperwork.
• The term sheet is the most crucial document to negotiate with the investors, despite its non-binding status (apart from clauses like confidentiality and exclusivity).
• All significant elements of the financing are covered in the term sheets. Examples include the company's valuation, control problems, and veto rights.
• The investors do not necessarily need to have control over the startup; they can just sit on the Board as an observer.
• Term sheets should be viewed by an entrepreneur as the blueprint for their partnership with the investor.
  

The term sheets that set forth the conditions under which an investor may make a financial investment in the company are created by venture capital investors also referred to as Angel investors. Typically, its three divisions are liquidation, corporate governance, and funding.

8. Debentures

Debentures are movable properties that take the form of certificates known as "Certificates of indebtedness" that are issued by companies or start-ups. If a company decides against raising capital through the sale of shares, it will instead issue debentures with a set maturity date and fixed interest rate.

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Conclusion

Choosing the right legal form for your business is vital, whether you are just getting started or it is in the growing stage. When choosing your company's legal structure, it's important to take into account a number of important variables, including flexibility, complexity, liability, taxes, control, capital investment, licenses, and permits.

Only when you establish a corporation is the capital investment by external funding such as investment, capital venture, or banks conceivable. Compared to sole proprietorships, they find it easier to receive this investment. Forming a limited liability company could seem like a good idea, but investors are reluctant to fund such a venture because of the potential tax ramifications and restrictions on participating in an LLC. As a result, the article's checklist of agreements is essential for your new start-up corporation.