What to Do When a Client Refuses to Pay
You’ve poured your heart into a project, sent a polished invoice, and waited for the payment that never arrives. Instead, you get excuses, silence,...
6 min read
You’ve built a promising startup, and now you’re ready to scale. You pitch to a group of angel investors, your heart racing as you share your vision. They seem interested, but when they ask for your term sheet and valuation details, you fumble—your documents are vague, and your legal structure isn’t clear. The investors pass, citing “too many unknowns.” This scenario is a harsh reality for many founders, but it’s avoidable with the right preparation. Raising investment is a high-stakes game, and a strategic, legally sound approach can make or break your funding dreams.
Legal GPS Pro
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
So, how do you raise investment for startups successfully? It starts with preparation, from crafting a compelling pitch to securing ironclad legal agreements. In this guide, we’ll walk you through the essential steps to prepare for raising startup capital, the legal documents you need, how to approach investors, and common mistakes to avoid. Packed with real-world examples and actionable pro tips, this post will equip you to navigate the investment process with confidence and secure the funding your startup needs. Let’s dive in.
Why Preparation Is Key to Raising Investment
Raising investment means securing capital from investors—such as angel investors, venture capitalists, or crowdfunding backers—in exchange for equity, debt, or convertible instruments like a SAFE (Simple Agreement for Future Equity). It’s a critical step for startups needing funds to scale operations, hire talent, or launch new products. But without preparation, you risk losing deals, facing legal disputes, or giving up too much control of your company.
Preparation is vital because investors aren’t just buying into your idea—they’re betting on your ability to execute. They expect a clear business plan, a realistic valuation, and professional legal documents that protect their investment. Failing to deliver these signals inexperience, scaring off potential backers. For founders, the stakes are high: limited funds, complex legal requirements, and the pressure to stand out in a crowded market make preparation non-negotiable. A solid plan not only secures funding but also ensures you retain control and align with the right investors.
Example – The Lost Investment Deal
Meet Sarah, a founder of a health-tech startup. She pitches to a venture capital firm, dazzling them with her app’s potential. But when asked for a term sheet, she provides a generic document downloaded online, with vague equity and governance terms. The investors, wary of unclear ownership stakes, pass on the deal. If Sarah had prepared a clear business plan and an attorney-drafted term sheet, she could have closed the $500,000 investment and accelerated her growth.
Pro Tip – Start with a Legal Checklist
Before pitching, use a startup funding legal checklist from Legal GPS to ensure all bases are covered—business structure, term sheets, shareholder agreements, and more. This keeps you organized and signals professionalism to investors.
Key Steps to Prepare for Raising Investment
Raising startup capital requires a strategic approach. Here are the essential steps to get ready:
- Refine Your Business Plan: Create a detailed plan outlining your product, market, revenue model, and growth strategy. Investors want evidence your business is viable and scalable.
- Value Your Company: Determine a realistic valuation using methods like discounted cash flow or comparable company analysis. Overvaluing can deter investors; undervaluing dilutes your equity.
- Build a Pitch Deck: Craft a concise, visually appealing deck covering your problem, solution, market size, traction, team, and financial projections.
- Identify Target Investors: Research investors who align with your industry and stage (e.g., angel investors for early-stage, VCs for growth). Use platforms like Crunchbase or AngelList.
- Prepare Legal Documents: Secure key agreements like term sheets, shareholder agreements, and investment contracts to protect both parties.
Each step builds investor confidence and reduces risks. A strong business plan shows viability, a realistic valuation ensures fair terms, and legal documents prevent disputes, making your startup a safer bet.
Example – The Overvalued Startup
Jake, a founder of a fintech startup, pitches to angel investors with a $10 million valuation, despite minimal revenue and early traction. The investors, seeing the valuation as unrealistic, decline to fund. Jake later adjusts his valuation to $3 million, backed by market data and financial projections, and secures $250,000 from a new investor group. A realistic valuation made all the difference.
Pro Tip – Use a Professional Valuation Tool
Invest in a professional valuation service or use online tools like Equidam or BizEquity to set a realistic company value. This ensures investor confidence and helps you negotiate fair equity terms without undervaluing your startup.
Legal Documents You Need to Raise Investment
Legal documents are the backbone of any investment deal, protecting both you and your investors. Here are the critical ones to prepare:
- Term Sheet: A non-binding document outlining the key terms of the investment, including amount, equity stake, valuation, and governance rights.
- Shareholder Agreement: Defines the rights and obligations of shareholders, including voting rights, dividend policies, and exit strategies.
- SAFE (Simple Agreement for Future Equity): A flexible, early-stage agreement that converts investment into equity at a later valuation, popular with startups.
- Investment Agreement: A binding contract detailing the full terms of the investment, including warranties, conditions, and dispute resolution.
Legal GPS Pro
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
These documents ensure clarity, protect your interests, and comply with securities laws. Using attorney-drafted templates saves time and reduces the risk of costly errors, especially for complex deals.
Example – The Vague Term Sheet Trap
Lisa, a founder of a SaaS startup, uses a generic term sheet for a $1 million investment. The vague language around board seats and liquidation preferences leads to disputes with investors post-funding, delaying her product launch. If Lisa had used an attorney-drafted term sheet from Legal GPS, the clear terms would have prevented confusion and secured the deal smoothly.
Pro Tip – Use a Term Sheet Template
Start with a customizable term sheet template from Legal GPS to outline investment terms clearly. These attorney-drafted templates cover valuation, equity, and governance, reducing the risk of disputes and impressing investors with your preparedness.
How to Approach Investors and Negotiate Terms
Approaching investors and negotiating terms is where preparation meets execution. Follow these steps to nail it:
- Research Investors: Identify investors who fund startups in your industry and stage. Check their portfolio on Crunchbase or LinkedIn to ensure alignment.
- Craft a Compelling Pitch: Tailor your pitch deck to highlight traction, market opportunity, and your team’s expertise. Keep it under 10 minutes for initial meetings.
- Schedule Meetings: Reach out via warm introductions (e.g., through mentors or networks) or cold emails with a concise teaser deck. Follow up politely.
- Present Legal Documents: Share your term sheet and other agreements early to show transparency and professionalism.
- Negotiate Terms: Be open to feedback on valuation, equity, or governance, but protect your core interests (e.g., maintaining control). Consult a lawyer for complex terms.
Presenting agreements professionally builds trust. Frame them as standard practice: “These documents ensure we’re aligned on terms, so we can focus on growing the business together.” This approach reassures investors and sets a collaborative tone.
Example – The Successful Pitch
Emma, a founder of an edtech startup, researches angel investors who fund education ventures. She crafts a 12-slide pitch deck highlighting her app’s 10,000 users and $50,000 in revenue. Armed with a Legal GPS term sheet, she pitches to a local angel group, clearly outlining a $2 million valuation and 20% equity offer. Her preparation and transparency secure $300,000, fueling her expansion.
Pro Tip – Practice Your Pitch
Rehearse your pitch with mentors, advisors, or peers to refine your delivery and anticipate investor questions. Record yourself to spot weak points, ensuring you project confidence and clarity during meetings.
Common Mistakes to Avoid When Raising Investment
Even prepared founders can stumble when raising capital. Here are common pitfalls and how to avoid them:
- Overvaluing Your Company: An unrealistic valuation scares off investors. Use data-driven methods and consult advisors to set a fair value.
- Skipping Legal Documents: Generic or missing agreements lead to disputes or unenforceable terms. Use attorney-drafted templates for clarity.
- Ignoring Due Diligence: Investors will scrutinize your financials, contracts, and IP. Prepare a data room with organized documents to speed up the process.
- Agreeing to Unfavorable Terms: Giving up too much equity or control can cripple your startup. Review all terms carefully and negotiate firmly.
Legal GPS templates are designed with clear, compliant language to avoid these issues, but always review major deals with a lawyer.
Example – The Equity Giveaway Mistake
Tom, a founder of a food delivery startup, accepts a $500,000 investment for 40% equity, desperate for funds. The high equity stake leaves him with little control, and investors later push for decisions against his vision. A balanced investment agreement, negotiated with a lower equity offer (e.g., 15%), would have preserved Tom’s influence and aligned investor interests.
Pro Tip – Consult a Lawyer for Big Deals
For investments over $100,000, hire a startup lawyer to review your term sheet, shareholder agreement, and investment contract. This ensures fair terms, protects your control, and avoids hidden pitfalls that could harm your startup’s future.
Conclusion
Raising investment for startups is a complex but rewarding journey. By refining your business plan, valuing your company realistically, preparing legal documents, and approaching investors strategically, you can secure the capital to scale your vision while protecting your interests. Avoiding common mistakes like overvaluation or vague agreements ensures you retain control and build lasting investor relationships.
Do you need a lawyer for your business?
The biggest question now is, "Do you need a lawyer for your business?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.
Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.
Legal GPS Pro
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
What to Do When a Customer Threatens Legal Action
You open an email from a customer, expecting a routine inquiry, only to find a chilling message: “I’m consulting a lawyer,” or worse, “You’ll hear...
What to Do When Someone Breaks Your NDA
You took the right step: you had someone sign a Non-Disclosure Agreement (NDA) to protect your confidential information. But now you’ve discovered...