You’ve nailed the pitch. The investor is nodding. The chemistry is there. And then they say those five words every founder dreads: “Send over your legal docs.”
This is where many promising startups stumble — not because of a bad business idea, but because of poorly drafted, incomplete, or missing agreements. Investors and their legal teams are trained to find red flags in paperwork. A messy cap table, a vague founder agreement, or an absent IP assignment can kill a deal faster than a flawed financial model.
The good news? Getting your legal house in order is entirely within your control. Here’s a breakdown of the agreements investors actually read — and what they’re looking for when they do.
1. Founders’ Agreement
This is the first document a savvy investor will ask for, and it tells them everything about the health of your founding team.
A strong founders’ agreement covers equity splits and the rationale behind them, roles and decision-making authority, vesting schedules (more on this below), what happens if a co-founder leaves, and how intellectual property is owned and transferred to the company.
Investors are not just checking boxes here — they’re assessing whether your team has had the hard conversations. If there’s no founders’ agreement, or if it looks like it was drafted in 30 minutes on Google Docs, that’s a signal that internal conflicts may be coming. And investors don’t fund potential drama.
What investors want to see: Clear equity ownership, a 4-year vesting schedule with a 1-year cliff, defined roles, and a clean exit mechanism for departing founders.
2. Founder Vesting Schedule
Vesting schedules are non-negotiable for institutional investors. They want to know that founders have “skin in the game” for the long haul and can’t walk away with a large equity stake after six months.
The standard structure is a 4-year vesting period with a 1-year cliff — meaning a founder earns no equity in the first year, then vests the remaining shares monthly over the following three years.
If your founders hold fully vested shares with no lock-in provisions, investors will either walk away or require a re-vesting agreement as a condition of funding. Neither scenario is ideal.
What investors want to see: Standard vesting schedules in place before any funding conversation gets serious.
3. Intellectual Property (IP) Assignment Agreements
Here’s a scenario that kills deals: a founder built the core technology before the company was incorporated — and never formally assigned it to the company. Legally, that IP still belongs to the individual, not the startup.
Investors are funding the company, not the founder personally. If the company doesn’t own its own technology, product, or brand, there’s nothing to invest in.
IP assignment agreements are signed by every founder and early employee to transfer any IP they created — even before joining the company — to the startup entity. This includes code, designs, patents, trade secrets, and more.
What investors want to see: Signed IP assignment agreements from all founders and key early contributors, covering pre-incorporation work.
4. Cap Table (Capitalization Table)
Technically a document rather than an agreement, the cap table is one of the first things any investor will request. It shows who owns what percentage of the company, including common shares, preferred shares, options, warrants, and convertible notes.
A clean cap table signals good governance. A messy one — full of informal promises, undocumented equity, or outdated information — is a major red flag.
Common cap table problems that spook investors include equity promised verbally but never formalized, former advisors or contractors holding large unearned stakes, and options granted without a proper stock option plan.
What investors want to see: An accurate, up-to-date cap table that accounts for all current and potential equity holders, ideally managed on a platform like Carta or Pulley.
5. Term Sheet
Once an investor expresses serious interest, you’ll receive or negotiate a term sheet. While typically non-binding (except for exclusivity and confidentiality clauses), the term sheet sets the foundation for the investment deal.
Key provisions include the pre-money valuation, investment amount, type of security (typically preferred shares), board composition, protective provisions, liquidation preferences, and anti-dilution clauses.
Founders who don’t understand term sheet mechanics often agree to terms that heavily favor investors — and regret it during future funding rounds or an exit. Understanding what each clause means before signing is critical.
What investors want to see: A founder who understands the term sheet and has competent legal counsel reviewing it.
6. Shareholders’ Agreement
Once investment closes, the shareholders’ agreement governs the relationship between the company and its equity holders. This is a binding document that every investor will read in detail.
It typically covers voting rights, information rights (the investor’s right to receive financial reports), drag-along and tag-along rights, right of first refusal on new shares, and anti-dilution protections.
This agreement also determines how much control founders retain after funding. Unfavorable terms here can leave founders outvoted on critical decisions or trapped in an exit they didn’t want.
What investors want to see: A balanced shareholders’ agreement that protects investor rights without stripping founders of meaningful control.
7. Employment Agreements for Key Team Members
Investors are also backing your team. They want to know that your key people are locked in and legally committed to the company — not working as informal contractors who could walk away at any time.
Proper employment agreements for co-founders and key hires should include compensation and benefits, confidentiality obligations, non-solicitation clauses, IP assignment (again), and termination provisions.
If your CTO is technically a freelancer with no written agreement, that’s a significant risk in an investor’s eyes.
What investors want to see: Formal employment or contractor agreements in place for all key team members, with IP and confidentiality provisions baked in.
8. Non-Disclosure Agreements (NDAs)
NDAs won’t close a deal on their own, but the absence of NDAs during early conversations about technology, clients, or proprietary processes can signal that a startup isn’t protecting its assets.
Investors also check whether the startup has enforced appropriate NDAs with potential partners, vendors, and early customers — especially those who had access to proprietary information.
Note: Most early-stage investors will not sign NDAs before an initial pitch. However, having your own NDA template ready for other business relationships shows legal maturity.
9. SAFE Notes or Convertible Notes (for Pre-Seed Rounds)
Many early-stage startups raise their first round using a SAFE (Simple Agreement for Future Equity) or convertible note rather than a priced equity round. These instruments allow investors to provide capital now in exchange for equity at a future funding round.
Investors will scrutinize the cap on the SAFE, the discount rate, any most-favored-nation (MFN) clauses, and how multiple SAFEs will affect the cap table at conversion.
Founders who stack multiple SAFEs without tracking dilution often face a painful awakening at their Series A.
What investors want to see: Clean, standard SAFE documents (Y Combinator’s Post-Money SAFE is the most accepted), with a clear understanding of dilution impact.
Getting Your Legal Foundation Right — The First Time
The pattern here is clear: investors are not just evaluating your product or traction. They’re evaluating whether your startup is fundable from a legal and governance perspective. A single missing document or poorly worded clause can delay funding by weeks, or kill the deal entirely.
The cost of fixing legal problems during due diligence is almost always higher than the cost of getting it right from the start.
Frequently Asked Questions (FAQ)
Q: When should a startup start preparing these agreements?
Ideally, before you launch. At a minimum, founders’ agreements, IP assignments, and vesting schedules should be in place before you take on your first customer or write your first line of product code. The longer you wait, the more complicated and expensive it becomes to clean things up.
Q: Do I need a lawyer to draft these documents?
Yes — especially for shareholder agreements, term sheets, and employment contracts. While templates exist for simpler documents like SAFEs, having a qualified startup lawyer review all agreements before signing protects you from costly mistakes.
Q: What’s the most common legal mistake startups make before fundraising?
Failing to assign IP from founders to the company is the most common — and most dangerous — mistake. It’s also one of the easiest to prevent with a properly drafted IP assignment agreement early on.
Q: Can investors really walk away over paperwork?
Absolutely. Due diligence exists specifically to uncover legal risks. If an investor’s legal team finds unresolved IP issues, missing vesting schedules, or an unclean cap table, they will either demand extensive (and expensive) cleanup before closing or pass on the deal entirely.
Q: What’s the difference between a term sheet and a shareholders’ agreement?
A term sheet is a preliminary, mostly non-binding document that outlines the proposed terms of an investment. A shareholders’ agreement is the final, binding contract signed at closing that governs the relationship between shareholders and the company going forward.
Ready to Get Investor-Ready?
At My Legal Pal, we work with early-stage and growth-stage startups to get their legal documentation right — before investors come knocking.
Whether you need a founders’ agreement drafted from scratch, your IP assignments reviewed, your cap table cleaned up, or guidance through your first term sheet negotiation, our startup legal team is ready to help.
Don’t let paperwork stand between you and your funding round.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Please consult a qualified legal professional for advice specific to your situation.
