Getting Ready for Seed Funding

Have you found yourself in a position where an investor is ready to discuss funding, but you recognize that the company’s records tell a less complete story than the pitch deck. A developer has worked without a signed agreement or an early adviser has been promised shares. Either of these issues necessarily prevent your company from receiving a seed investment. However, such matters need to be solved before the investor can fully assess what it is investing in.

Seed and pre-seed investors need a reliable account of the company’s ownership, assets and commitments. The financing arrangement must also work under Finnish company law.

What the company owns and owes

The shareholder register should reflect with the underlying share subscriptions, transfers and corporate decisions. Similarly, you might have a separate cap table that also includes outstanding options, convertible instruments and other commitments that may give someone a right to shares.

An informal promise made to an adviser can lead to a difficult negotiation when a new investor expects that the ownership structure of the company is clear. Therefore, you should always keep record of any open issues and resolve those with the person concerned, as leaving the matter pending only postpones an issue that might delay the completion of the investment round.

The same approach applies to technology. Identify who created the software or other core intellectual property, what rights the company has acquired, and which rights it uses under licence. Employment, founder and contractor arrangements may produce different answers. A paid invoice does not show which rights were transferred. Thus, if you become aware that a missing IP assignment needs to be signed, approach the holder of such rights while there is still time to negotiate.

Choose the financing instrument with the next step in mind

When you are considering an investment for your company, you may choose from several instruments. An equity investment through a share issuance brings financing into the company in exchange for shares.

A loan on the other hand postpones or avoids an immediate share issue, while creating repayment and other contractual obligations. A convertible loan combines functions from both equity and loan instruments. Its usefulness depends on the conversion terms, the treatment of interest and the outcome if the expected financing round does not happen.

Requirements arising from Finnish corporate practice and from companies law must be built into the chosen arrangement. Under the Finnish Companies Act, issuing shares and granting special rights entitling to shares require the relevant corporate decisions. A directed share issue and the grant of such rights, including a convertible loan, also need a weighty financial reason from the company's perspective. Therefore, a foreign template, including a US SAFE, should be reviewed for its Finnish implementation, accounting and tax consequences before it could be used.

What the investment round related agreements need to cover

The investment agreement is a customary agreement used in the equity based financing models. One of the core purposes of it is to connect the legal requirements to the commercial rationale of the financing round. In practice, it records who the investors are, what rights they receive, how and when the subscriptions of the shares are paid, and what steps should be completed prior to closing the financing round. Such steps might include resolving an ownership gap, obtaining a necessary consent or adopting the corporate decisions for the round.

The investment agreement generally also contains certain “promises” given about the company, often called as warranties. The warranties should be evaluated diligently against the actual records and qualified through the agreed disclosure process where necessary. A founder should understand whether a statement is given by the company, personally by the founder, or by both, and especially what liabilities follow if the given warranty turns out to be incorrect.

Finally, in connection with the financing of the companies, it is usual that the shareholders’ agreement is updated. Such agreement is the core governance tool that deals with the continuing relationship between the shareholders after the investment. Shareholder agreement should be aligned with the investment agreement and the articles of association, particularly concerning decision-making rights of the company and matters related to the share transfers of the company’s shares.

Prepare for completion before the signing date

Reflecting all the matters discussed under this article the key word for the founders and management of the company is preparation. Prepare your company for the financing with the required diligence and work backwards from the date the company needs the financing. Allow time for investor questions, missing signatures, corporate approvals and any required registrations.

As financing rounds and the preparation of investment documentation are a core part of our daily practice at Nordic Law, we would be happy to discuss any questions you may have in relation to your company.