Raising Venture Capital
Secure the funding your startup needs with counsel who has worked both sides of the cap table — and knows where the traps are in term sheets before you sign one.
Counsel Who Has Worked Both Sides of the Cap Table
Most startup attorneys have only ever represented founders. We have also worked as investors — screening deals, reviewing cap tables, and watching what happens to founders who signed term sheets without understanding what they agreed to. That perspective changes the quality of the advice we give at every stage of a raise.
Raising venture capital is fundamentally a securities transaction governed by federal law, with compliance obligations that begin the moment you first solicit an investor. The exemptions that most startups rely on — Regulation D under the Securities Act of 1933 — carry conditions that are easy to violate accidentally and difficult to unwind after the fact. We structure raises to stay inside those exemptions from day one, so that a securities violation doesn't surface during your Series B due diligence or an acquisition.
Securities Law Exemptions: How Private Raises Are Legal
Selling securities — which includes equity, SAFEs, convertible notes, and most instruments investors receive — requires either registration with the SEC or a valid exemption. Registration is impractical for startups; the exemptions are what make private fundraising possible. The two most commonly used:
- Regulation D, Rule 506(b) (17 CFR § 230.506(b)) — The standard exemption for most seed and Series A rounds. Allows raises of unlimited size from up to 35 non-accredited but "sophisticated" investors and an unlimited number of accredited investors, with no general solicitation permitted. Investors receive restricted securities with a 6-to-12-month resale restriction under Rule 144.
- Regulation D, Rule 506(c) (17 CFR § 230.506(c)) — Permits general solicitation (public advertising, social media outreach, demo day pitches to open audiences), but all investors must be verified accredited investors — not self-certified. If you are raising publicly or using a platform that broadcasts your round, you are likely in 506(c) territory whether you know it or not.
Accredited investor status (17 CFR § 230.501(a)) is defined by net worth exceeding $1 million (excluding primary residence) or income exceeding $200,000 individually ($300,000 joint) in each of the two preceding years. The SEC expanded the definition in 2020 to include holders of Series 65/66 licenses and "knowledgeable employees" of private funds, among others. We advise on investor verification procedures and maintain the documentation required to demonstrate compliance in any future diligence review.
Both exemptions require filing a Form D with the SEC within 15 days of the first sale of securities. Missing this filing is a violation — it does not invalidate the exemption in most cases, but it creates regulatory exposure and complicates future raises.
Instrument Structures: SAFEs, Convertible Notes, and Preferred Stock
The choice of instrument affects valuation, dilution, investor rights, and how much leverage founders retain at the priced round. The three instruments used in almost every early-stage raise:
- SAFE (Simple Agreement for Future Equity): The Y Combinator standard form, now in its post-money SAFE version. A SAFE is not debt — it carries no interest rate, no maturity date, and no right to demand repayment. It converts to equity (typically preferred stock) at a future priced round, subject to a valuation cap and/or discount. Post-money SAFEs make dilution explicit, which is founder-friendly in theory but requires careful attention to the pro-rata rights provisions that most institutional investors will expect to negotiate.
- Convertible notes: Debt instruments that bear interest and have a maturity date, converting to equity at a discount at the next qualified financing. Unlike SAFEs, they create a repayment obligation if the company never raises a priced round — a risk that gets more serious as more time passes. Most-favored nation clauses in early notes can create unintended consequences when later investors receive better terms.
- Priced preferred stock (Series A and beyond): Governed by a certificate of incorporation amendment under Delaware General Corporation Law ( 8 Del. C. § 151 et seq. ) establishing the rights, preferences, and privileges of the new series. The NVCA model documents are the market standard; deviations from those forms are negotiated items that affect founder control and economics through every subsequent financing event.
Key Term Sheet Provisions Founders Should Understand
The term sheet is not binding on most economic points, but it sets the negotiating posture for the full documents. The provisions that matter most:
Determines how proceeds are distributed in a sale or wind-down before common stockholders receive anything. A 1x non-participating liquidation preference is market standard at Series A. Participating preferred means investors get the preference and participate pro rata, which substantially reduces founder and employee proceeds in moderate-outcome exits.
Broad-based weighted average anti-dilution is market standard — it adjusts the conversion price of preferred stock in a down round by a formula that accounts for the size of the new issuance. Full ratchet anti-dilution is heavily investor-favorable and should be resisted; it can be severely punishing in down rounds.
The right to participate in future financing rounds to maintain ownership percentage. Major investor pro-rata rights are standard and generally acceptable; pro-rata rights extended to every participant in a seed round can create administrative burden and complicate future institutional rounds.
Who controls the board controls the company. A typical Series A board is two founders, one investor, and two independents — deviations from this structure (particularly investor majority boards) warrant careful scrutiny of the protective provisions that accompany them.
Investor veto rights over specified company actions — issuing new stock, selling the company, taking on debt, amending the charter. These are standard and appropriate for investors; the scope and threshold for triggering them is where negotiation matters.
Single-trigger acceleration (vesting accelerates on acquisition alone) is rarely accepted by acquirers. Double-trigger (acquisition plus termination without cause) is more defensible and protects founders without creating a retention problem for the buyer.
Planning your next fundraising round?
Schedule a consultation to review your cap table, structure your raise, and negotiate terms you'll be able to live with at Series B.