In this third installment of Startup Evolution, we focus on how U.S.-based founders can smartly and safely raise those critical first dollars. From bootstrapping your idea with personal savings to structuring a friends and family round, courting angel investors, leveraging SAFEs, and closing a pre-seed deal, we will unpack the key legal documents, securities compliance steps and founder protection strategies at each stage. An experienced startup attorney’s perspective underpins the advice, ensuring you don’t just raise money—you do it in a way that safeguards your venture and vision.
Bootstrapping: Funding Yourself and Laying the Legal Foundation
Most founders begin by bootstrapping—using personal resources to fund the startup’s initial operations. This approach keeps you in full control and avoids immediate dilution of your ownership. However, “self-funding” does not mean “no legal work.” Even without outside investors, you should set up a strong legal foundation from day one.
- Key Documents: Form your business entity and execute founder agreements early. Upon incorporation, issue founder’s stock (often for nominal cash and intellectual property assignment) and consider a vesting schedule for co-founders. Secure IP assignment agreements to ensure the company owns all inventions and code from the start. Keep records of any personal funds you put into the company (whether as a capital contribution or a loan) in case they need to be repaid or converted to equity later.
- Securities Compliance: Bootstrapping means you are not selling securities to others yet, so federal securities laws are generally not triggered. Still, maintain proper corporate records. If you treat your cash infusion as a loan, document it with a simple promissory note to avoid future misunderstandings. Revisit compliance once you bring in outside money.
- Considerations for this Funding Stage: A vesting schedule on founder stock is crucial insurance. It protects the team if a founder leaves early, allowing the company to repurchase unvested shares and reallocate them to those still building the business. Also, separate personal and company finances. Open a business bank account and avoid commingling funds; reimburse personal expenses through documented processes. These practices not only instill good discipline but also make future due diligence easier.
Friends and Family: Tapping Personal Networks with Care
After exhausting personal funds, many entrepreneurs turn to their personal network. A friends and family round can provide a modest cash infusion when your startup is little more than a pitch deck or prototype. While these investors are typically motivated by their relationship with you, it is essential to handle this stage with professionalism and legal rigor.
- Key Documents: Even if Uncle Joe and your college roommate trust you, get everything in writing. Common structures here include small equity subscriptions, unsecured loans or convertible notes. For equity, use a simple stock purchase or subscription agreement that spells out the number of shares and price. For loans or convertible notes, prepare a promissory note or convertible note agreement with clear terms, including the interest rate, maturity and the process for converting to equity. Some startups opt to use a SAFE at this stage as a lightweight alternative to a note (see a discussion on SAFEs below). Whichever instrument you choose, ensure each investor signs the document and acknowledges the high-risk nature of the investment.
- Securities Compliance: Remember that taking money from friends still means issuing securities subject to SEC rules. Rely on a Regulation D private offering exemption to avoid full SEC registration. Ideally, limit this round to accredited investors (wealthy or sophisticated individuals), as that simplifies compliance. If you do include non-accredited investors, be aware that under Rule 506(b) you can have up to 35 of them, but you must provide disclosure documents equivalent to those in a public offering and ensure they are “sophisticated” enough to evaluate the deal. This can increase legal costs and complexity. Also, avoid any public solicitation—keep the ask within your personal network. File a Form D notice with the SEC and relevant states to cover your bases. Doing it right at this stage will prevent nasty surprises that could scare off serious investors later.
- Considerations for this Funding Stage: Treat these investors well, but set proper boundaries. Maintain control by issuing non-voting stock or using convertible instruments that do not give away decision-making power in your company’s infancy. Make sure everyone understands that this is a long-term, illiquid investment; managing expectations now will reduce pressure later. Importantly, avoid taking so much money (or at such a low valuation) that you give away a large chunk of equity prematurely. Preserve your cap table for the future – later institutional investors will scrutinize it. A clean, well-documented friends and family round, with no onerous rights granted to early informal investors, will protect you when it is time to negotiate with VCs down the road.
Angel Investment: Bringing in Early Outside Investors
Angel investors – affluent individuals or groups who invest their own capital – are often the next stop in the funding journey. Angels can bring not just money, but also mentorship and connections. Legally, this stage starts to look more structured than friends and family, though deals are still relatively simple compared to venture capital rounds. Early-stage companies frequently use convertible securities for angel investments, delaying the need to price the company’s stock.
- Key Documents: If using convertible notes, you will need a Note Purchase Agreement (if multiple investors are coming in) and the convertible promissory notes themselves for each investor. These notes will specify the interest rate, maturity date and conversion triggers. Many angels today instead use SAFEs (Simple Agreements for Future Equity) or similar instruments. A SAFE is just a short agreement – typically no more than a few pages – that defines the conversion terms (valuation cap and/or discount) for the future equity round. If an angel round is done as an equity financing (sometimes called a “seed” equity round), you will have a basic term sheet and then closing documents: a Stock Purchase Agreement, an updated Certificate of Incorporation creating a new class of preferred shares (if issuing preferred stock) and possibly a light Investors’ Rights Agreement. Unlike a heavy Series A set, seed equity documents are often simplified “Series Seed” templates with limited terms.
- Securities Compliance: Nearly all angel investors will be accredited, which keeps your Regulation D exemption straightforward. Under Rule 506(b) of Reg D, selling to accredited investors with no general solicitation is standard practice – you will just file a Form D notice within 15 days of the first sale. Because all investors are accredited, you will not need to supply a private placement memorandum, though you should still provide information that a reasonable investor would want. State “blue sky” laws are preempted for Rule 506 offerings, meaning a single SEC filing usually covers you, but your legal counsel will need to confirm that. Always avoid public advertising of the deal unless you opt for Rule 506(c) (which allows general solicitation only if all purchasers are accredited and you verify their status). In most angel rounds, 506(b) is the path of least resistance.
- Considerations for this Funding Stage: Angels are typically friendly, but it is still crucial to protect your interests. Cap table control is one concern – use conversion caps on notes/SAFEs to prevent unlimited dilution but set them at a reasonable future valuation. If you raise successive notes/SAFEs, be mindful of how they will convert into equity; model different scenarios so you are not surprised by how much ownership you and your team end up giving away. Also, negotiate any special rights carefully. For example, angels may ask for a side letter giving them pro rata investment rights in the next round (so they can maintain their ownership). That is usually acceptable but try to avoid granting individual investors excessive control or board seats at this stage. Keep governance simple; many startups remain with a founder-only board until a priced VC round, perhaps with an informal advisory board for mentorship. Finally, remember that convertible notes have a maturity date – if your note is nearing maturity and you have not raised a priced round, be proactive and seek an extension or conversion to equity to avoid an angel demanding repayment when your startup likely cannot afford it.
Pre-Seed Financing: Bridging to Your First VC Round
“Pre-seed” has emerged as the label for that round after angels/SAFEs but before a full-blown Series A. Often, this is the first institutional money in – perhaps a small micro-VC fund, an accelerator with a capital arm or an organized angel syndicate. The amounts vary (sometimes $100,000 up to $1 million+), and the structure can range from a SAFE or note (if the round is modest and no one insists on pricing it) to a priced equity round creating a new class of preferred shares (if the round is larger or led by a more formal investor). Pre-seed deals require founders to balance getting enough capital to hit key milestones against minimizing complexity for the upcoming Series A.
- Key Documents: If the pre-seed is done via convertible notes or SAFEs, the documentation remains the same as discussed above, possibly with more negotiation on terms like the valuation cap (since, by now, your startup likely has some traction to justify a higher cap). It is not uncommon for startups to do multiple SAFE or note closings rolling up to their target amount – sometimes called a “SAFE round” – before converting them all in the Series A. If the pre-seed is an equity round, you will use simplified preferred stock financing documents. Many investors use the open-source “Series Seed” set or a trimmed-down version of NVCA model documents. Expect a Certificate of Incorporation amendment to create “Series Seed Preferred” stock, a Stock Purchase Agreement, and usually a thin Investors’ Rights Agreement (covering basic investor rights like information rights and pro rata rights). There might also be a Voting Agreement and Right of First Refusal/Co-Sale Agreement, though some very small rounds defer those until Series A. The term sheet for a priced pre-seed generally sets a valuation and a fixed equity percentage for the new investors. Keep terms simple – aim for 1x non-participating liquidation preference (meaning investors get their money back first, but nothing more) and light protective provisions so that the company is not handcuffed on ordinary business decisions.
- Securities Compliance: By the pre-seed stage, your investors will almost universally be accredited (funds or experienced angels), so the same Reg D 506(b) safe harbor applies. No general solicitation; provide information upon request; file your Form D. One thing to watch: if you have raised multiple SAFE/note rounds and are now doing a priced round, ensure you properly integrate those financings for compliance purposes. If you used any different exemption (like a small intrastate round or Rule 504 offering for friends and family), let your attorney know so the Series Seed stock issuance can be structured to avoid any conflict with those prior exemptions.
- Considerations for this Funding Stage: Pre-seed is often the first time you encounter term sheets from seasoned investors, so be prepared to negotiate founder-friendly terms where possible. Focus on governance and control: if you can, keep the board structure in founder control at least until Series A. For example, a common setup is a three-person board (two founders and one investor director) or even just the founders with the major investor as a board observer. This assures you maintain agility. Also, pay attention to any protective provisions (veto rights) investors demand – they might ask for approval rights on very significant actions (like selling the company or issuing new stock), which is reasonable, but avoid an extensive list of veto items that could require investor approval for routine decisions. Ensure that your founder stock vesting is updated if needed. Investors usually want to see founders on a vesting schedule (typically, four years total with a one-year cliff) so that if a founder departs, they do not walk away with unearned equity. If you never set that up, a pre-seed investor might request it now; it is often easier if you have already self-imposed vesting when you incorporated (as noted in Bootstrapping above). Finally, consider implementing or expanding an employee stock option pool at this stage if your investors do not already insist on it. They might require, say, a 10% option pool set aside pre-money (reducing your effective valuation) to incentivize hires until Series A. While it is dilutive to founders, having a pool is important to attract talent—and negotiating the size now can prevent the Series A investors from pushing for an even larger pool later on.
Preparing for a Series A: A Primer for What Comes Next
Early funding rounds are steppingstones toward the first major venture capital round: Series A. As you approach this milestone, both legal and business preparedness will dramatically improve your odds of success. On the legal side, start operating as if due diligence could begin any day. That means cleaning up your cap table – ensure all prior equity issuances, SAFEs and notes are documented and reflected accurately. If you have a mishmash of SAFE agreements, consider converting some to equity or consolidating terms if feasible so you enter Series A negotiations with clarity on ownership. Make sure you have filed all necessary forms (like SEC Form D for each round) and complied with any state laws for each issuance; outstanding securities compliance issues can kill a Series A deal if a VC’s lawyers uncover them.
It is wise to conduct an internal legal audit: Are your incorporation documents, board minutes and stock ledgers up to date? Do you have signed invention assignment agreements from every employee and contractor? Are key assets like trademarks or patents properly owned by the company? Identifying and resolving any gaps now will save frantic scrambling during the Series A due diligence process. Many founders prepare a basic “data room” with all corporate documents, ready to share with serious investors on request.
How We Can Help You Move Forward
Early-stage funding is as much about setting the stage for the future as it is about getting money in the bank. As a founder, you now have a roadmap to navigate bootstrapping and initial fundraising with legal savvy. Leverage these insights to protect your dream as you finance it. If you find this article helpful, stay tuned for the next installment of Startup Evolution, where we will continue to build out your founder’s toolkit. In the meantime, if you are seeking tailored legal guidance—whether you are bootstrapping, finalizing a pre-seed deal or preparing to jump to Series A—I invite you to reach out. Let’s connect and ensure your startup’s legal foundation is secure every step of the way.
You can read our previous publications for more information on SAFEs and legal due diligence.
Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.
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