When do I fundraise for a startup, before or after his creation and registration?

Asked 7 months ago - 10118

Hello,

Can I start a fundraising before the company is created, so I could pay legal creation's procedures with the fundraised, or do I need to create and register the company first ?

If I can fundraise before the company's creation, how the VC can transfert the funds raised?

Thank you by advance,
Best regards.

Attorney answers (3)

  1. Frank Anthony Natoli

    Pro

    Contributor Level 19

    2

    Lawyers agree

    Answered . I think you need to start a relationship with a good business lawyer and begin a strategy that makes sense in context of your objectives. A entity yet to be formed cannot raise funds. Further you need to be very careful about your process here because there is an austere regulatory regime regards to SEC and other compliance when you sell shares or interests in your business.

    I suggest that you consult with a lawyer in private and discuss your objectives in more detail. You can start by calling around to several for a free phone consultation, get some insights then pick the best fit to work with.

    Best regards,
    Frank
    Natoli-Lapin, LLC

    DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-... more
  2. Mark S Britton

    2

    Lawyers agree

    Answered . If I understand your question correctly, you would like to get the cash first to finance any organizational expenses you have. While there are some contorted ways to do this, the concept doesn’t make much sense.

    First, you mention VCs. VCs like to invest in big ideas that are already under way. Few investors are going to invest just in your ideas or “slideware” (i.e., a PowerPoint explaining your ideas). Sometimes they will do it if you already have a successful start-up on your resume; but if that were the case you wouldn’t be worrying about the costs of forming your corporate entity.

    Second, there is a standard dance that goes into raising money. If you follow the steps correctly then you have a better chance of VCs giving you money. If you introduce an odd dance step then VCs ask lots of questions, slow down your deal and possibly avoid it all together. Why waste a minute explaining why you don’t have a corporate entity in place? It’s just not that expensive if money is around the corner.

    Third, if your idea is so great that VCs will fund it before you even have the corporate entity organized, then a law firm will advance you the funds until your round closes. Legit VCs and legit law firms know each other and, if the deal is real, most start-up savvy law firms are happy to push-out a soon-to-be-funded start-up’s billings until the round closes.

    Finally, you should want a legal entity in place in order to shield your personal assets. If you raise money before that entity is in place, then an investor may have the ability to pursue your personal assets (your car, for example) for repayment of those funds.

    Good luck with your big new idea!

  3. Dana Howard Shultz

    Contributor Level 20

    Answered . You can start fundraising activities at any time. However, when prospective investors conduct due diligence as part of their decision-making process, they will expect the corporation to have been properly formed.

    This information does not constitute legal advice and does not establish an attorney-client relationship.

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