How to Prepare for a Funding Round and Protect Founding Partners in Startups

Introduction

Startups, as engines of innovation, rely on access to capital to make their growth and development viable.

After the Family, Friends & Fools phase—an initial funding scheme from close networks—it becomes relevant to open the business to third-party investors and prepare for and execute the necessary funding rounds.

Beyond the financial implications, this process requires a solid legal structure and strategy to protect the interests of the founding partners and balance the interests of other stakeholders.

This article summarizes the essential steps for preparing a funding round, accessing capital, and protecting founders through anti-dilution clauses, as well as analyzing Series A rounds and how they fit into a company’s growth cycle.

1. Legal Preparation for a Funding Round

Preparing an optimal legal strategy is essential to ensure a successful funding round. Generally, the main steps are as follows:

• Signing Non-Disclosure Agreements (NDAs): Essential for protecting sensitive information that may be shared with investors.
• Pre-money valuation of the company: This allows investors to understand the equity-to-capital ratio.
• Preparing and signing the Term Sheet: A non-binding contract that defines preliminary terms of the investment and the entry framework for investors.
• Due Diligence: Aimed at allowing investors to understand the startup’s legal, financial, and operational reality. Legally, this includes reviewing contracts with clients, suppliers, labor, intellectual property, regulatory compliance, and any contingencies that may affect the transaction.
• Negotiation of the Investment Agreement: A binding contract governing all terms of the investment, including the rights of investors and founders and the capital’s entry structure. Protective clauses such as anti-dilution, pre-emption rights, drag-along, and tag-along rights, as well as exit conditions, should be established here.
• Capital entry by investors: Clearly differentiating between founding partners, capital partners, and industrial partners.
• Simultaneous negotiation and signing of the shareholder agreement: This should govern the rights and obligations among partners and between partners and the company.

2. Accessing Investment Capital

Accessing investment capital requires knowledge of available sources and how to interact with them:

• Business Angels: Individual investors who provide capital in early stages, seeking startups with high growth and scalability potential.
• Venture Capital Funds: Key for startups in later stages, with a tested model and MVP, and in expansion mode.
• Series A Funding Rounds: Often targeted by Venture Capital Funds, these rounds provide a significant capital injection after initial (pre-seed or seed) rounds. Series A investors expect the startup to have reached certain milestones and be ready to scale. Series A rounds are typically valued between €2 million and €15 million, depending on the sector and growth potential.
• Equity Crowdfunding: Through platforms like Crowdcube, startups can attract capital from numerous small investors. This model is increasingly solidifying as an alternative funding path for high-growth potential companies.
• Public Funds: Various public and semi-public programs support tech startups and other strategic sectors. Examples include initiatives from Enisa, CDTI (Centro de Desarrollo Tecnológico Industrial), or red.es.

The example of the Galician startup Galy, which has attracted investments from wealthy individuals and companies like Inditex, demonstrates how to capture the interest of both institutional and private investors, thanks to a solid presentation and clear value proposition.

3. Protecting Founders: Anti-Dilution Clauses

One of the biggest risks founders face in a funding round is the dilution of their ownership, reducing their equity percentage (and thus control) in the company.

Solution: Anti-dilution clauses in the investment agreement and/or shareholder agreement allow for adjustments to founders’ equity in future rounds and limit the loss of control over the company.

Beyond anti-dilution clauses, it is crucial to negotiate veto rights, enhanced majorities, board participation, and preferential purchase rights so that founding partners retain control over the company.

Conclusion

Raising a funding round is a complex process requiring both solid legal preparation and a clear financial strategy. From signing an NDA and structuring a term sheet to protecting founders through anti-dilution clauses and carefully planning investor capital entry, Series A rounds represent a critical moment in a startup’s growth, where project professionalism and scalability become the most essential elements.

At Summons Abogados, we offer comprehensive advisory services for startups throughout the entire investment cycle, ensuring that each funding round is managed efficiently and that the interests of founding partners are always protected.