Common Legal Mistakes Startup Founders Make While Seeking Investment Funding

Seeking investment funding is not easy but it’s a crucial way to get the capital you need to run and grow your businesses. However, there are a number of common legal mistakes startup founders can easily make while seeking investment funding; mistakes that can derail their efforts. Here, we reveal what these mistakes are, so you don’t need to make them.

  1. Advertising to and/or Soliciting Investors

It is illegal for startup founders to advertise to investors or solicit them for money. It’s crucial that founders understand this distinction, so they avoid making this mistake because unfortunately, in the eyes of the law, ignorance of the law is not an acceptable defence.

Advertising refers to any offline or online ad that asks for money from potential investors for their startup. Solicitation refers to asking for money via email, post, or some other form of communication. The only time when solicitation is legally allowed is when there is already evidence of a strong ‘pre-existing relationship’ between both parties.

The bottom line is don’t advertise anywhere that your company is selling stock or ask anyone to buy stocks unless there is already a pre-existing relationship established.

  1. Selling to Risky Investors

Some founders can be so eager to get investment capital that they jump the gun and simply take money from any investor offering it. It’s understandable considering they want to get their business off the ground but it’s not a good idea.

The safest way is to ensure you’re selling to experienced investors. Experienced investors are financially strong investors who have a high net worth or a significant amount of assets behind them to justify them being a safe investor.

  1. Using Unregistered Brokers

Be wary of someone who claims to be a broker who can sell or buy shares on behalf of your company but who isn’t registered. If you use an unregistered broker for these transactions, then you’re breaking the law.

Use the Financial Services Register to find broker-dealers and firms registered with the FCA and PRA.

  1. Not Investigating the Investor 

Too many startup founders make the mistake of accepting capital from investors without first investigating who they’re accepting money from. When you’re accepting funding from investors, you need to remember that it now means they’ll be tied to your company for a specific period and the investment also grants them certain rights and responsibilities within your company. Here are a few things to ask yourself before accepting money from an investor:

  • What is their motivation for investing?
  • What kind of person are they?
  • Do they have good references?
  • Will the investor add value beyond simply providing capital?

Final Words

Avoid these common mistakes while seeking investment funding and you’ll avoid running into unnecessary legal issues. Legal issues are always a common problem for startup founders when seeking investment, so it is worth making a note of these points to avoid complications.

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