The investment process for startups: from investable to closing

The investment process for startups: from investable to closing

For many founders, fundraising feels like a sprint. You work towards a pitch, have discussions with investors and hope to reach a deal as soon as possible. However, an investment round is rarely one decisive moment. It is a process with several phases, in which legal, financial and strategic choices are constantly being refined.

That process deserves more attention than is often thought. Not only because delay is expensive, but especially because this phase lays the foundations for governance, control, dilution, future rounds and ultimately the exit. In practice, an investment that seems attractive on paper can be quite disappointing if the conditions are skewed or the documentation is not well thought out.

At Startup-Recht, we regularly see that founders pay a lot of attention to the valuation and the amount that is raised, but less to the structure of the deal. This is understandable, but also risky. A good investment round not only provides money, but also peace, clarity and a workable framework for the next growth phase.

Become investable first: the basis must stand

Before a startup gets serious with investors, the company must be investable. By that, we not only mean that the business model must be interesting enough, but also that the legal and organizational basis is in order.

In practice, this means, among other things, that the cap table is correct, the shareholder structure is transparent and it is clear which rights already exist. Internal governance must also be clear. Who can make which decisions? Have special control rights already been granted? And is the company legally well equipped for the next growth step?

In addition, documentation plays a major role. Examples include contracts with customers and suppliers, management agreements, financial statements and the position of intellectual property. Especially for tech companies, the latter is crucial. If software, code, data or other IP is not properly placed in the company, uncertainty quickly arises about the value of the company.

This is where things often go wrong. Many startups build product and traction first, and only look at legal housekeeping later. This is understandable at an early stage, but during an investment process, this backlog often becomes visible. What still seemed to be solvable internally suddenly becomes an issue in the negotiations.

A startup that has its foundations in order is arguably stronger. Not only because the process is faster, but also because an investor has fewer leads to tighten conditions or put pressure on timing.

Positioning towards investors: vision and manageability

After the internal preparation comes the external positioning. The startup must be able to explain convincingly what problem it solves, how the business model works, where the growth should come from and why external capital is needed right now.

In addition, the pitch deck, financial forecasts and equity story must logically link. An investor not only wants to hear a good story, but also to see that the company understands where the risks lie and how they are managed.

This is an important point for startups and scale-ups in the tech sector. Investors are not only looking at product, market and team, but also at maturity. How tightly organized is the company? How well are processes defined? Is the legal structure ready for growth? Anyone who only sells vision but shows no control leaves room for doubt.

A strong positioning therefore consists of two layers. On the one hand, there is the commercial story: market, product, timing, growth potential. On the other hand, there is the organizational story: structure, ownership, governance and feasibility. It is precisely this combination that makes a startup attractive for investors.

The term sheet: this is where the real deal making starts

As soon as an investor is serious about getting in, a term sheet or LOI usually comes up on the table. This document contains the main points of the investment and is often the starting point for further development. Although many provisions in this phase are not yet fully binding, the term sheet does have a lot of weight.

Here are the topics that will later form the core of the deal. These include valuation, the share percentage that is issued, liquidation preference, anti-dilution protection, control, good leaver and bad leaver, exclusivity and the reservation of due diligence.

For founders, this is often a difficult phase, because it is easy to focus too much on valuation. A high valuation feels like a profit, but in itself says little about the quality of the deal. If, on the other hand, strong control mechanisms, broad veto rights or tough economic preferences are opposed, the same deal can later be restrictive.

In practice, it is wiser to assess the term sheet as a total package. Not only the price is relevant, but especially the combination of economic rights, administrative influence, information obligations and exit mechanisms. A slightly lower valuation with balanced terms can be much healthier for the company in the long run than an apparently lucrative deal with tough terms.

For startups, now is the time to look beyond the headline numbers. Those who negotiate insufficiently sharply now often only notice this much later, when tensions arise about decision-making, dilution or future rounds.

Due diligence: the phase where loose ends become visible

After the term sheet, due diligence usually follows. This is the study in which the investor checks whether the company legally, financially, commercially and fiscally matches the picture that was previously outlined.

Legal due diligence is a reality check for many startups. This phase looks at, among other things, the company's incorporation and statutes, previous share issues, existing shareholder agreements, intellectual property, commercial contracts, employment relationships, management structure, claims, disputes and any compliance or licensing issues.

For young growth companies, this is often the time when informal agreements and practical shortcuts start working against them. For example, software appears to have not been properly transferred to the BV. Advisors or developers have carried out work without a clear contractual basis. Agreements between co-founders have been discussed, but never properly recorded. Or the cap table appears to be less clean than expected.

These kinds of points do not always have to be deal breaking, but they almost always have an effect on the dynamics of the process. An investor may require additional guarantees, include closing conditions, adjust the timing, or review price and conditions.

That's why due diligence isn't something that only starts as soon as the investor asks questions. For startups, it is smarter to make that exercise internal before the process really starts. The better the company knows its own file, the less likely it is that the process will come under pressure after all.

The investment structure: equity, loan, or anything in between

An investor can join in various ways. The most visible route is a share round, where the investor immediately obtains shares in the company. But that is not the only option, and certainly not the most logical one in every situation.

Accession via shares

In a classic equity investment, the investor gets shares in the company. This can be ordinary shares, but also other types of shares with different economic or controlling rights. Depending on the desired relationships, you can also work with a structure in which control and economic interest are distributed in a specific way.

In that case, the documentation often consists of a shareholders' agreement, investment documentation, any amendment to the statutes and a notarial deed of issue. When special rights are linked to certain shares, those rights must be legally defined in detail. It is precisely at that level that the provisions that later determine benefits, liquidation and decision-making are often anchored.

Accession via a loan or convertible instrument

A second route is financing via a loan or a convertible instrument. Then the investor does not step in directly as a shareholder, but first as a creditor or as a party with a future conversion right.

This can be attractive when the valuation is still difficult to determine or when parties want to arrange financing but do not want to completely break open the governance immediately. In this structure, agreements about interest, duration, ranking, repayment, conversion times, discount, valuation cap and concrete conversion triggers are essential.

For startups, this can be a practical interim solution, but only if you carefully consider what happens in the next round, an exit or a disappointing scenario. Here, too, flexibility can lead to complexity later on day one if the conditions are not developed sharply enough.

Hybrid forms

In addition, there are hybrid variants in which elements of debt and equity come together. In such structures, for example, the investor receives repayment rights or interest, combined with additional upside or a right to later acquire shares under certain conditions.

These types of instruments usually require heavier and more technical documentation. Financial rights, any conversion or exercise mechanisms and control agreements must be well linked. For founders, it is therefore important not only to look at speed or apparent simplicity, but at how the structure works out in practice over a longer period of time.

Choosing a form of investment determines more than just funding

For startups, choosing the instrument sometimes feels like a technical issue. That's not it. In practice, the chosen form of entry partly determines who gets what position, when dilution occurs, how future rounds can be arranged and what rights parties have in the event of an exit.

That is why the question is not only about how much capital is contributed, but mainly about the legal and economic conditions under which this happens. A round of shares can be logical if the relationships are clear and direct participation is desired. A convertible loan can be a better fit when the valuation is still moving. A hybrid form can be useful when flexibility is needed, but it also requires more precision.

The core is always the same: accession is tailor-made. It is not the name of the instrument that is decisive, but the concrete elaboration of rights, obligations, control, return and exit. Founders who think about this carefully at an early stage prevent the structure from restricting growth later.

Closing: the moment when everything becomes legally real

The closing is the point at which the negotiated deal is actually executed. Until that point, there is often already a substantive agreement, but legal changes will only change once the conditions have been met, the final documentation has been signed and the transaction is formally executed.

In a share round, that usually means more than just signing a contract. Management and shareholder resolutions are often also necessary, the statutes may need to be amended and the issue or transfer of shares takes place notarized. Only then did the investor actually become a shareholder and the cap table changed.

In addition, financial settlement plays a central role. The investment amount is often only deposited as soon as it is clear that all conditions have been met. The documentation therefore usually accurately states which steps take place in which order, who must deliver which documents and when payment becomes due.

It is precisely in this phase that it becomes clear how important good transaction documentation is. Closing regularly depends on precedent conditions, such as completing due diligence points, obtaining internal approvals, amending statutes, formalizing intellectual property or repairing flaws in the cap table. As long as these conditions are not met, closing can be postponed or even not take place.

For founders, closing often feels like the finish line. Legally and strategically, it is rather a tipping point. From that moment on, the new agreements really apply. The startup has then not only received funding, but also brought in an investor with contractual and sometimes statutory rights that have a direct impact on daily practice.

Post-closing: from now on, the model must also work

After closing, the phase begins in which the agreements made become operational. The governance agreements are coming to life, information obligations are becoming current and the relationship between founders and investors is taking concrete shape.

Think of periodic reports, KPI monitoring, covenants, approval rights, agreements about budgets and provisions regarding follow-up rounds of exit. What still seemed abstract during the negotiations will now become part of the company's daily decision-making.

This is an important realization for startups and scale-ups. An investment round changes not only the balance sheet, but also the dynamics in the boardroom. So the question is not only whether the investment will make ends meet, but also whether the company can function properly under the new governance model.

A well-structured round provides clarity, predictability and strength. A poorly thought-out round actually leads to delays, discussions about powers and unrest when it comes to next steps.

What startups often forget in practice

In many processes, we see the same errors recurring. The startup is already going public with fundraising even though the internal base is not yet firm enough. As a result, the direction quickly shifts to the investor.

Common bottlenecks include a messy cap table, unclear IP rights, informal founder agreements, missing governance documentation and too little attention to control and exit provisions. A one-sided focus on valuation also remains a classic.

These are not details. These are points that directly affect ownership, control and how subsequent rounds can be designed. For founders, it is therefore wise to look at the big picture early on. Not only: how much money do we raise? But also: under what conditions, with what rights, and what does that mean for the company in one, three and five years?

Finally: an investment process is primarily a structural question

An investment process for startups is not a separate transaction, but a legal and strategic process. From initial preparation to closing and subsequent cooperation, choices are made that will last in the company for a long time.

If you only look at the amount in the bank account, you miss what it's really about. The real value of a good investment round lies in the combination of capital, clear agreements and a structure that leaves room for growth. That is why it pays to focus early on investability, documentation, governance and the content of the deal.

For startups and scale-ups, fundraising is only really successful if the investment not only helps today, but also proves workable tomorrow. This requires preparation, precision and the guts to look beyond the headline valuation.

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