series a financing laws and regulations in nycBy: Shaliz Sadig

So your business is more than an idea: it’s gotten off the ground, thanks in part to your investment of time, effort and brilliant business savvy.  Of course, to get to this point, no one can forget that much needed initial raise of capital from self-financing, good old family and friends, angel investors, or a combination (aka the “Seed Round”). But now you’re looking to expand and grow beyond development, and it’s time to graduate to the next level:  Series A Financing.  

What is Series A Financing?

Following the seed round, Series A is the first stage of financing to help a business progress from the development phase to the functional and operational.  This round is usually conducted before the business has demonstrated any net profit (although there may be existing revenue) and signals the appearance of the first outside investors.  Its purpose is to prove the concept and business model you’ve designed as one that’s both successful and attractive to other parties, as well as to raise funds that will allow you to do things like hire employees, produce a physical product to distribute, and construct an initial marketing plan.  The typical amount for a successful Series A round is often between two and five million dollars.  While that may seem like a hefty amount, this stage usually requires less than subsequent Series of financing.

What kind of legal issues should I consider when financing?

It’s important to have the information necessary to meet due diligence requirements when investors start investigating the merits of the opportunity you’re presenting.  They’ll want to know more than just your intended plan for the money you’re raising.  It’s advisable to keep organized records with key information and documents on hand including information on management, marketing, financing and corporate compliance. Any sophisticated investor will want to make sure that (among other things): you have a properly formed entity, your business is or will be qualified to do business in the locations and territories where you plan to operate and there are no known or threatened liabilities.  When in doubt, your corporate lawyer can help guide you on the importance of having a good foundation for your company.

The Series A round involves some legal documents and considerations that you should keep in mind when seeking investors. The NVCA (National Venture Capital Association) provides base documents that provide a useful snapshot of common terms and forms to anticipate.  Such documents include a Term Sheet, a Stock Purchase Agreement, an Investor Rights Agreement, a Right of First Refusal and Co-Sale Agreement, a Voting Agreement, and a Schedule of Exceptions, among others.  Depending on how much you need their money and how much the investors are lining up to invest in your business, there will be a tug of war on key issues within these agreements.  Some of the most common issues revolve around the valuation of the shares, the level of control of the investors and minority shareholder rights.

As with prior rounds of funding, you must also make certain that you adhere to federal and state (“Blue Sky”) securities laws when soliciting and selling stock to potential investors, or else you may face claims of misleading investors or securities fraud.

Series A financing can generate some serious cash for your business.  But make sure legal documents are properly drafted, you and your company are prepared for due diligence, and securities laws are followed.  Otherwise you may not be able to raise enough capital to take your business to the next level.

Contributing Editor: Leah Norod

Shaliz Sadig, Esq

Shaliz Sadig

Associate Attorney

(212) 865-9848

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