Preparing your Company for an Early Round of Financing: The Importance of Maintaining Good Records
Author: Aly Somani
We often speak to founders of early stage companies that are preparing for an initial financing. One of the first discussions I have with the founders is whether the company’s records are up-to-date. For instance: Have shares been issued? Have directors been elected? Have bylaws been passed? Is there a shareholders’ agreement in place and if so, has it been papered? Unfortunately, many founders can only produce their articles of incorporation evidencing that they have registered a company.
Corporate maintenance is not likely to be on many founders radars while working hard to build their businesses. However, preparing and maintaining records is required by law, it is essential for good governance and it builds confidence with investors. Sophisticated investors will conduct pre-investment diligence, they will want to review your corporate records and require you to warrant that your records are up-to-date.
Missing board resolutions, unsigned documents or other missing key corporate documents can come across as unprofessional and disorganized and the consequences can range from additional costs to get your records in order and a delay in closing the financing to potentially losing an investor completely.
Maintaining good records from the start gives you an easy opportunity to stand apart.
Here are some tips for maintaining good records:
- Prepare an accurate cap table. If you have granted any employees equity or options, set aside shares pursuant to an employee stock option plan, issued any SAFEs or convertible debt, make sure it is reflected on your cap table.
- Work with your lawyer to ensure that your minute books are current: The directors and officers have been duly appointed, shares have been validly issued, your company has been organized and your registers are up-to-date.
- Meet regularly as a board and shareholder group and keep detailed notes of those meetings then file those minutes in your minute book.
- If you are unsure, ask for advice!
The author of this article gratefully acknowledges the contributions of summer student Reza Sarsangi.