What Legal Issues Should a Growing Company Address Before Bringing in Investors?

Raising outside capital can be an important milestone for a growing company. New investment may provide the resources to expand operations, develop products, enter new markets, hire key personnel, or pursue strategic opportunities.

But bringing investors into a company involves much more than agreeing on a valuation and accepting capital.

Investors may scrutinize the company's ownership structure, corporate records, contracts, intellectual property, employment relationships, financial obligations, and potential liabilities before committing funds. The investment itself can also affect voting rights, control, future financing, and the company's long-term direction.

For business owners and executives, preparing these areas before serious investor discussions begin can help identify potential problems early and put the company in a stronger position when due diligence starts.

Is Your Company Ready to Bring in Investors?

Before approaching investors, leadership should consider whether the company is legally and operationally prepared for outside investment.

Sophisticated investors typically want a clear understanding of what they are investing in and what risks already exist.

Questions may include:

• Who currently owns the company?
• What percentage does each owner hold?
• Are there outstanding options, warrants, or convertible securities?
• Are the corporate records complete?
• Who owns the company's intellectual property?
• Are important customer and vendor agreements documented?
• Are there pending disputes or liabilities?
• Have previous issuances of securities been properly handled?
• Are employment and contractor relationships appropriately documented?
• What rights will new investors receive?
• How will the investment affect existing owners?

Addressing these questions before the fundraising process becomes urgent can make due diligence more manageable.

Review the Company's Legal Structure

The company's entity structure can affect how an investment is structured and what rights investors receive.

A growing business may operate as a:

• Corporation
• Limited liability company
• Partnership
• Other business entity

The structure that made sense when the company was founded may not necessarily align with its current financing objectives.

Leadership should understand the company's governing documents, ownership rights, tax structure, management authority, and any restrictions that could affect a proposed investment.

Depending on the transaction, restructuring may be worth considering before new investors come in.

Make Sure Ownership Records Are Accurate

One of the first issues investors may examine is the company's capitalization.

A company's capitalization table, commonly called a cap table, should clearly identify its ownership interests and other securities.

Depending on the company, that may include:

• Common shares or membership interests
• Preferred equity
• Stock options
• Warrants
• Convertible notes
• SAFEs or other convertible instruments
• Employee equity awards

An inaccurate or incomplete cap table can create uncertainty about who owns the company and what percentage will remain after the financing.

The SEC's Office of the Advocate for Small Business Capital Formation identifies maintaining an accurate cap table and preparing financial information as fundamental parts of becoming ready to raise investor capital.

Understand Dilution Before Agreeing to a Deal

When a company issues new equity, existing owners may see their percentage ownership decrease.

That is dilution.

Dilution is not inherently negative. A smaller percentage of a more valuable company may ultimately be worth significantly more than a larger percentage of a company with fewer resources.

But founders and existing owners should understand the consequences before completing a financing.

Questions to consider include:

• How much of the company will the investors own after closing?
• How will founders' percentages change?
• Will an employee equity pool be created or expanded?
• Are there existing anti-dilution provisions?
• What happens if the company raises another round?
• Will the investors receive preferred rights unavailable to common owners?

The SEC specifically notes that later-stage companies should evaluate which existing owners will be diluted and whether prior investor agreements or equity compensation plans may affect a new financing.

Review Your Governing Documents

Before accepting an investment, companies should review the documents governing ownership and management.

Depending on the entity, these may include:

• Articles or certificates of incorporation
• Bylaws
• Operating agreements
• Shareholder agreements
• Voting agreements
• Buy-sell agreements
• Existing investor agreements
• Board resolutions
• Equity incentive plans

These documents may contain provisions affecting the company's ability to issue new equity, approve a financing, transfer ownership interests, or grant particular rights to new investors.

It is better to discover those restrictions before negotiating a transaction than immediately before closing.

Get Corporate Records in Order

Investors may want to confirm that the company has properly documented important corporate actions.

That can include:

• Formation documents
• Board and shareholder approvals
• Equity issuances
• Amendments to governing documents
• Major transactions
• Officer appointments
• Financing arrangements
• Material contracts

Missing approvals or inconsistent records can complicate due diligence and create questions about whether previous corporate actions were properly authorized.

A growing company should treat corporate recordkeeping as an ongoing responsibility rather than something to reconstruct when an investor requests documents.

Protect the Company's Intellectual Property

For many companies, intellectual property is among their most valuable assets.

That can include:

• Trademarks
• Copyrights
• Patents
• Software
• Proprietary technology
• Trade secrets
• Product designs
• Business methods
• Data
• Brand assets

Investors will want to understand whether the company actually owns the intellectual property that drives its business.

Problems can arise when founders, employees, contractors, developers, or outside vendors created important intellectual property without clear written assignment provisions.

For example, paying a contractor to develop software does not necessarily resolve every ownership issue by itself.

Companies preparing for investment should identify important intellectual property, verify ownership, review registrations where applicable, and address gaps before they become due diligence concerns.

Review Employee and Contractor Agreements

People are often another significant component of company value.

Investors may therefore examine how key employees, executives, consultants, and independent contractors are engaged.

Relevant documents can include:

• Employment agreements
• Independent contractor agreements
• Confidentiality agreements
• Intellectual property assignment agreements
• Equity compensation documents
• Offer letters
• Incentive arrangements
• Executive agreements

Companies should also examine whether workers have been appropriately classified and whether compensation and equity arrangements have been properly documented.

If a company's key technology or customer relationships depend heavily on one individual, investors may also consider what would happen if that person left.

Review Material Business Contracts

Investors may want to examine contracts that materially affect the company's revenue, expenses, obligations, and future operations.

These can include:

• Customer agreements
• Vendor agreements
• Supplier contracts
• Distribution agreements
• Licensing agreements
• Technology agreements
• Leases
• Loan agreements
• Strategic partnership agreements
• Joint venture agreements
• Government contracts

Particular attention may be paid to provisions involving:

• Termination
• Automatic renewal
• Exclusivity
• Minimum purchase requirements
• Indemnification
• Limitation of liability
• Intellectual property
• Assignment
• Change of control
• Confidentiality
• Dispute resolution

A proposed investment itself may trigger consent or notice requirements under an existing agreement.

Identify Existing Debt and Financial Obligations

Outside investment does not erase the company's existing obligations.

Investors may examine:

• Bank loans
• Lines of credit
• Founder loans
• Equipment financing
• Convertible debt
• Outstanding notes
• Security interests
• Guarantees
• Significant unpaid obligations

Existing financing agreements may contain restrictions on additional debt, ownership changes, asset transfers, or other corporate actions.

Understanding these obligations can help prevent unexpected problems during the financing process.

Resolve—or Clearly Disclose—Pending Legal Issues

A company does not necessarily need to be free of every dispute before raising capital.

But leadership should understand existing legal exposure and be prepared to address it accurately.

Potential issues may include:

• Pending litigation
• Threatened claims
• Customer disputes
• Employment disputes
• Intellectual property claims
• Regulatory inquiries
• Tax issues
• Contract defaults
• Compliance concerns

Trying to conceal a known problem can create significantly greater issues than addressing it directly.

Companies should identify material legal risks, evaluate their potential impact, and determine what disclosures may be appropriate during the investment process.

Understand That Raising Capital Can Involve Securities Laws

One of the most important issues for companies to recognize is that selling ownership interests to investors generally involves securities laws.

Calling a transaction a “friends and family round,” “seed round,” “angel investment,” or “Series A” does not remove those requirements.

Under federal law, offers and sales of securities generally must either be registered with the Securities and Exchange Commission or qualify for an exemption from registration.

Private companies frequently rely on exemptions when raising capital.

Potential pathways can include:

• Regulation D offerings
• Regulation Crowdfunding
• Regulation A
• Intrastate offerings
• Other available exemptions

The appropriate structure depends on the company, investors, amount being raised, how investors are solicited, and other factors.

Companies should evaluate securities compliance before seeking or accepting investor funds rather than attempting to address it after the transaction.

What Is Regulation D?

Regulation D contains exemptions commonly used for private offerings.

For example, Rule 506(b) and Rule 506(c) provide different pathways for qualifying private offerings.

One significant difference involves how investors may be solicited.

Rule 506(b) generally does not permit general solicitation, while Rule 506(c) can permit broader solicitation when its requirements are satisfied, including requirements relating to accredited investors.

Rule 504 provides another exemption for certain offerings and currently permits qualifying companies to raise up to $10 million during a 12-month period.

The correct exemption should be evaluated before the company begins marketing the investment opportunity.

What Is an Accredited Investor?

The term accredited investor is important in many private capital raises.

Federal securities regulations establish financial and other criteria that can allow individuals or entities to qualify as accredited investors.

The concept matters because some offering exemptions restrict participation by non-accredited investors or impose different requirements depending on who invests.

For example, Rule 506(c) generally requires purchasers to be accredited investors and requires the issuer to take reasonable steps to verify that status.

Companies should not simply assume that someone qualifies because the person appears wealthy or has significant business experience.

Be Careful About Publicly Advertising an Investment Opportunity

A growing company may naturally want to announce that it is raising money through social media, newsletters, networking events, or other public channels.

But doing so can have securities-law consequences.

Some private offering exemptions restrict general solicitation, while others permit it only if specific requirements are satisfied.

That means a founder's LinkedIn post or public pitch about an investment opportunity can potentially matter from a securities compliance perspective.

Companies should understand which offering exemption they intend to rely upon before publicly soliciting investors.

Consider State Securities Requirements Too

Federal securities law is only part of the analysis.

State securities laws may also impose registration, exemption, filing, fee, or notice requirements depending on the offering and where investors are located.

Certain federal exemptions may preempt some state registration requirements, but state notice filings and antifraud provisions may still apply.

A company raising money from investors in multiple states should therefore evaluate both federal and applicable state requirements.

Prepare for Investor Due Diligence

Once serious discussions begin, investors or their advisors may request access to substantial information about the company.

A due diligence request may cover:

• Formation and corporate records
• Capitalization
• Financial information
• Tax matters
• Material contracts
• Intellectual property
• Employees
• Benefits
• Litigation
• Regulatory compliance
• Insurance
• Real estate
• Debt
• Previous financings
• Data privacy and cybersecurity
• Immigration matters involving key personnel

Preparing these materials in advance can reduce delays and give management an opportunity to identify inconsistencies before investors do.

Immigration Can Become Part of Corporate Due Diligence

For companies employing foreign nationals, immigration may also become relevant during an investment or transaction.

Investors may want to understand whether key executives, researchers, engineers, or other employees depend on employer-sponsored immigration status.

Potential considerations can include:

• Current visa classifications
• Pending immigration petitions
• Employment-based permanent residence cases
• Work authorization
• Employer obligations
• Upcoming expirations
• Changes to the company's ownership or structure
• Whether future restructuring could affect sponsored employees

For companies whose value depends heavily on international talent, immigration should not be isolated from broader corporate planning.

This is one area where Lacki & Company's combination of corporate and immigration counsel can be particularly valuable.

Understand What Rights Investors Are Requesting

Investment negotiations are not only about how much money the investor contributes or what percentage of the company they receive.

Investors may negotiate for additional rights, including:

• Board representation
• Voting rights
• Information rights
• Inspection rights
• Preferred distributions
• Liquidation preferences
• Anti-dilution protections
• Preemptive or participation rights
• Approval rights over major decisions
• Registration rights
• Rights relating to future financings
• Exit-related provisions

Some rights can significantly affect how founders and executives operate the company after the financing.

Management should understand the practical consequences of those provisions rather than evaluating them only in isolation.

Think About Control, Not Just Valuation

A high valuation can be attractive, but valuation is only one part of an investment transaction.

A company should also consider how the deal changes governance.

For example:

• Who appoints the board?
• Which decisions require investor approval?
• Can founders issue additional equity?
• Can the company take on significant debt?
• What happens if the company is sold?
• Can investors block certain transactions?
• What happens in the next financing round?

An investment that looks attractive economically can still significantly alter the balance of control within the company.

Consider the Next Financing Round Before Closing This One

A company's first institutional investment is rarely evaluated in isolation.

Terms agreed to today can affect future financing.

New investors may examine rights granted to previous investors, capitalization, liquidation preferences, convertible instruments, anti-dilution protections, and other existing obligations.

The SEC also advises companies raising later-stage capital to consider how current investor agreements and ownership arrangements may affect future rounds.

Leadership should therefore consider not only whether a proposed financing works today but how it may position the company for its next stage of growth.

What Happens if a Company Raises Capital Without Proper Compliance?

Failing to comply with securities laws can create serious consequences.

Depending on the circumstances, those consequences may include government enforcement, investor lawsuits, financial penalties, and potential rights allowing investors to seek the return of their investment.

Past compliance problems can also create complications during future fundraising because sophisticated investors may examine previous securities issuances as part of due diligence.

Fixing a poorly structured financing after the money has already been accepted can be far more difficult than structuring it appropriately from the beginning.

Create an Investor-Ready Company Before the Pitch

Investor readiness is not just about creating an impressive presentation.

A company can have a compelling product, growing revenue, and ambitious plans while still carrying legal issues that make investors hesitant.

Before beginning a significant capital raise, leadership should consider reviewing:

• Corporate structure
• Capitalization
• Governing documents
• Corporate records
• Intellectual property
• Employment and contractor arrangements
• Material contracts
• Debt
• Existing investor rights
• Litigation and liabilities
• Regulatory compliance
• Securities compliance
• Immigration matters involving key personnel

Addressing these areas early can help management approach negotiations with a clearer understanding of the company investors are being asked to finance.

Preparing Your Company for Investment

Bringing in investors can change a company's trajectory—but it can also change ownership, governance, control, and legal obligations.

For growing companies, the strongest time to identify legal issues is often before an investor discovers them during due diligence.

Lacki & Company advises emerging and middle-market businesses on corporate transactions, capital formation, contracts, intellectual property, business strategy, and related legal matters. The firm's combined business and immigration practice can also help companies consider the needs of international executives and other key foreign-national employees as the organization grows.

Whether your company is preparing for its first outside investment or pursuing another stage of financing, thoughtful legal preparation can help leadership understand the transaction, address potential risks, and position the business for its next phase.



Contact Lacki & Company to discuss your company's legal needs before bringing in outside investors.