Do You Need a Lawyer to Raise Investment for Your Business?
Raising money for your business is exciting—and often overwhelming. Whether it’s a $10K check from your uncle or a $250K convertible note from an...
8 min read
When raising early-stage funding for your startup, convertible notes often emerge as a popular financing option. These debt instruments that convert to equity at a later date can offer flexibility and simplicity compared to traditional equity rounds. But as you prepare to issue convertible notes, a crucial question arises: should you hire a lawyer to draft the documents, or can you handle it yourself using templates available online?
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This guide explores the considerations that should inform your decision, helping you balance legal protection with cost-efficiency during this critical stage of your startup journey.
Understanding Convertible Notes and Their Complexity
Convertible notes are short-term debt instruments that convert into equity, typically when a company raises a priced equity round or reaches another triggering event. While conceptually straightforward, these financial instruments contain nuanced terms that significantly impact both founders and investors:
- Valuation caps set the maximum company valuation for conversion purposes
- Discount rates offer investors shares at a reduced price compared to future investors
- Interest rates determine how much additional equity investors receive
- Maturity dates establish when the notes must convert or be repaid
- Conversion triggers define the events that cause automatic conversion
- Pro-rata rights may give investors the option to participate in future rounds
The interplay between these terms creates a sophisticated financial arrangement with long-term implications for your company's ownership structure and investor relationships.
The DIY Approach: Benefits and Risks
Many founders are tempted to use template convertible note documents found online or through startup platforms. This approach offers several advantages:
Lower immediate costs. Templates are typically free or low-cost, avoiding legal fees that can range from $500 to $7,500 for professionally drafted convertible note packages.
Speed and convenience. You can download templates instantly and customize them quickly, potentially accelerating your fundraising timeline.
Simplified process. For very small, straightforward funding rounds with friends and family, templates might provide adequate documentation.
However, the DIY approach carries significant risks:
One-size-fits-all limitations. Templates cannot address the unique circumstances of your business, industry, or investor relationships. As one legal resource notes, there are "inherent limitations to these automated doc generator tools; many of which law firms utilize more for marketing reasons" than for comprehensive legal protection.
Missing critical provisions. Templates may not include important provisions specific to your jurisdiction or business model, creating unintended vulnerabilities.
Improper customization. Without legal expertise, founders might modify templates incorrectly, creating internal inconsistencies or unenforceable terms.
Future complications. Problems in convertible note documentation often don't surface until conversion time, when they can disrupt important financing rounds or exit opportunities.
When Legal Counsel Is Particularly Valuable
While not every convertible note requires attorney involvement, certain situations strongly warrant professional legal guidance:
Larger funding amounts. As the funding amount increases, so does the complexity and potential risk. For rounds above $1-1.5MM+, equity (particularly seed equity) should be given strong consideration over convertible notes, requiring more sophisticated documentation.
Multiple investors. Managing multiple convertible notes with potentially different terms requires careful coordination to avoid conflicts or cap table problems.
Institutional investors. Professional investors often expect professionally drafted documents and may request specific terms that require legal expertise to implement properly.
Complex cap tables. If your company already has multiple classes of stock or previous convertible instruments, professional guidance helps prevent dilution surprises or conflicts between investor rights.
Industry-specific considerations. Certain industries (like healthcare, fintech, or regulated sectors) may require specialized provisions in investment documents.
Pro Tip – Assessing Your Need for Legal Support
Before deciding whether to hire a lawyer, consider these questions:
- Is this your first time raising money through convertible notes?
- Are you raising more than $250,000?
- Do you have multiple investors with potentially different expectations?
- Does your business operate in a highly regulated industry?
- Do any investors require unusual or custom terms?
- Will this round be followed by institutional investment in the near future?
If you answered "yes" to two or more of these questions, professional legal assistance likely represents a sound investment.
The Value a Lawyer Brings to Convertible Note Drafting
Hiring a lawyer to draft your convertible notes provides several important benefits:
Legal compliance. Securities laws are complex and vary by jurisdiction. Convertible notes in Canada operate within a legal framework shaped by federal and provincial regulations, securities law considerations, and tax implications. These factors are crucial for structuring agreements, and the same complexity exists in the U.S. and other countries. A lawyer ensures your offering complies with relevant securities regulations.
Customized terms. A lawyer can craft terms specific to your company's needs and circumstances rather than relying on one-size-fits-all templates.
Protection of founder interests. Experienced startup attorneys help balance investor protections with founder interests, ensuring you don't unnecessarily give away rights or control.
Future-proofing. Good legal counsel anticipates how convertible note terms will interact with future funding rounds, preventing complications that could derail important transactions.
Investor confidence. Professional documentation signals seriousness and competence to investors, potentially making your offering more attractive.
Negotiation support. Beyond drafting, attorneys can help you understand which terms are negotiable and which are market standard, strengthening your position with investors.
Example – The Unexpected Conversion Problem
TechStart, a promising software startup, used online templates for $400,000 in convertible notes from three different angel investors. Each note had slightly different terms, modified by the founders to accommodate specific investor requests. The documents seemed fine until TechStart secured a $3 million Series A round eighteen months later.
During due diligence, the lead VC discovered inconsistencies in the conversion provisions. One note was unclear about whether the valuation cap applied to pre-money or post-money valuation, creating an ownership dispute that threatened to derail the entire round. Another note contained contradictory language about conversion timing.
TechStart had to hire an attorney to resolve these issues, costing them $12,000 in legal fees and delaying their funding by six weeks—during which they almost missed payroll. Had they invested in proper legal documentation initially, these problems would have been avoided.
Finding Middle Ground: Cost-Effective Legal Options
If budget constraints make traditional legal representation challenging, consider these alternatives:
Limited-scope representation. Many startup attorneys offer "unbundled" services where they review and customize templates you've selected rather than drafting documents from scratch.
Startup legal platforms. Services like Clerky, Gust, or LegalZoom offer more sophisticated document automation than free templates, often with some level of attorney review.
Incubator/accelerator resources. If you're part of a startup program, they may provide access to legal resources or discounted services.
Law school clinics. Many law schools operate entrepreneurship clinics that provide free or low-cost legal services to startups. These files were created and vetted by students and supervising attorneys at the University of Pennsylvania Law School's Entrepreneurship Legal Clinic (the "ELC") applying Pennsylvania law, and similar programs exist at many major universities.
Deferred fee arrangements. Some law firms specializing in startup work offer deferred billing options, where legal fees are paid when you raise your next round.
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The Cost-Benefit Analysis
When evaluating whether to hire a lawyer, consider these financial factors:
Typical legal costs. According to recent data, various factors will affect the cost of a convertible note agreement, including the complexity of the note terms and the location where the investor and company are located. Professional legal services for convertible notes typically range from $1,500 to $5,000 for standard packages, with more complex situations reaching $7,500+.
Risk calculation. The cost of fixing legal problems after they emerge is typically 3-5 times higher than preventing them, not counting opportunity costs from delayed financing.
Investor expectations. Many investors expect or require professional documentation, particularly as investment amounts increase. Many people have written to me regarding the absence of a useable public convertible note template that lawyers and startups can leverage for seed deals; particularly startups outside of SV, which has very different norms and investor expectations from other markets.
Long-term impact. The terms of early convertible notes can impact your cap table and governance for years to come, making this an area where short-term savings can lead to significant long-term costs.
Pro Tip – Maximizing Value from Legal Services
To get the most from your legal investment:
- Come prepared with a clear understanding of your desired terms
- Ask for fixed-fee arrangements rather than hourly billing when possible
- Request attorney-reviewed templates for future use
- Consider splitting legal costs with your investors (some investors expect this)
- Build a relationship with a startup attorney who can grow with your company
Alternative Funding Instruments: SAFEs vs. Convertible Notes
Before committing to convertible notes, consider whether Simple Agreements for Future Equity (SAFEs) might better suit your needs. Traditional convertible notes represent loans, which include features like a maturity date, interest rate, and repayment obligations. The terms of these agreements can be complex and time-consuming to negotiate.
SAFEs offer several advantages:
- No maturity date or interest, simplifying the instrument
- Standardized documentation from Y Combinator
- Not classified as debt on your balance sheet
- Generally simpler legal structure
However, SAFEs may be less familiar to some investors and lack certain protections that convertible notes provide. Convertible notes are more complex because they involve interest and repayment terms. With a SAFE, investors may have to wait longer to get shares since there's no deadline.
The choice between these instruments may influence your need for legal assistance, as SAFEs generally require less customization but still benefit from professional review.
A Balanced Approach: When and How to Use a Lawyer
For most startups, a balanced approach to legal support for convertible notes makes sense:
- For very small friends-and-family rounds (under $100,000), template documents with basic legal review may suffice.
- For angel rounds ($100,000-$500,000), consider having an attorney customize templates to your specific needs.
- For larger seed rounds ($500,000+) or rounds involving institutional investors, full legal support is typically warranted.
Additionally, consider these practical steps:
- Review sample documents before engaging an attorney to better understand key terms
- Ask your network for attorney recommendations with relevant experience
- Discuss fee structures upfront and explore alternative billing arrangements
- Consider building an ongoing relationship with a startup-focused attorney who can support your company's growth
Example – The Value of Legal Counsel
MedTech Innovations saved approximately $3,000 by using online templates for their initial $350,000 convertible note round. However, when preparing for their $2 million seed round a year later, they discovered their cap table was difficult to interpret because of inconsistent conversion terms across their notes.
Their potential lead investor insisted they clean up their cap table before proceeding. MedTech had to hire a specialized attorney at $450/hour, ultimately spending over $10,000 to resolve the issues—more than three times what they would have spent on proper documentation initially. The funding was delayed by two months, forcing them to slow product development.
In contrast, their competitor BioSolution invested $4,500 in proper legal documentation for a similar-sized convertible note round. When they raised their seed round, the due diligence process proceeded smoothly, allowing them to close their round in 45 days and accelerate their market entry.
Conclusion
While it's technically possible to create convertible notes without legal counsel, the decision should be based on a careful assessment of your specific circumstances and risk tolerance. For many startups, professional legal guidance on convertible notes represents an important investment rather than merely an expense.
The complexity of securities laws, the long-term implications of financing terms, and the importance of investor relationships all suggest that this is an area where professional guidance often proves valuable. As one legal expert points out, convertible notes can be a great investment for many start-ups, but it is important to know the potential risks before becoming a seed investor. Again, an experienced lawyer can help you navigate the complex legal landscape.
The optimal approach often involves finding the right level of legal support for your specific situation—whether that's full-service representation for complex rounds or limited review of template documents for straightforward friends-and-family financing. By thoughtfully assessing your needs and options, you can strike the right balance between legal protection and cost efficiency, setting your startup on a solid foundation for growth.
FAQs About Legal Assistance for Convertible Notes
If we use standard convertible note templates, do we still need a lawyer?
While templates provide a starting point, they cannot address your specific situation or ensure compliance with local securities laws. At minimum, having a lawyer review and customize templates to your situation is recommended for most funding rounds.
What specific securities law issues arise with convertible notes?
Convertible notes are considered securities and thus subject to federal and state securities laws. Offering securities without proper exemptions can lead to rescission rights (investors can demand their money back, with interest) and even personal liability for founders. A securities attorney ensures your offering complies with relevant exemptions.
How do convertible note terms affect future funding rounds?
Conversion provisions, valuation caps, and investor rights in convertible notes can significantly impact your cap table and negotiating position in future rounds. Professional guidance helps ensure these early decisions don't create problems for later financing.
Can't investors just provide their own lawyers?
While investors often have legal representation, those lawyers represent the investors' interests, not yours. Having your own counsel ensures someone is looking out specifically for the company's and founders' interests in the transaction.
What's the minimum amount of legal help we should get for convertible notes?
At minimum, consider having a startup attorney review your convertible note documents before finalizing them, even if you use templates for the initial drafting. This limited review can identify major issues while managing costs.
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Protect your business with our complete legal subscription service, designed by top startup attorneys.
- ✅ Complete Legal Toolkit
- ✅ 100+ Editable Contracts
- ✅ Affordable Legal Guidance
- ✅ Custom Legal Status Report
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