In a raise, the investment documents from earlier rounds decide the most with the least warning.
I have seen an early investor put a small cheque into a company and take shareholder terms so restrictive, and so weighted in their own favour, that the next investor walked away the moment they read the shareholders' agreement. The next raise died because of it. Nobody had looked at the paperwork from the next investor's side.
A new investor reads the paper trail before they read the pitch. They look at every instrument the company has issued and every agreement attached to it. A few common problems slow everything down or end the conversation:
1. Shareholder agreements with control rights, vetoes or pre-emption terms that a later investor will not accept
2. Convertible notes, SAFEs and options with terms that nobody has modelled into the fully diluted position
3. Informal promises of equity that were never documented
4. Share issues without the supporting resolutions and paperwork
5. Investor documents from different raises that differ from each other or from the register
Before the new season opens:
1. Gather every investment document from every previous raise into one place.
2. Read each shareholder agreement and instrument as a new investor would and list the terms a later investor will challenge.
3. Reconcile the cap table against the share register and every issue of shares since incorporation.
4. Model the round you intend to raise, including the effect of every instrument and your option pool on dilution. Check the rules for employee share schemes with your lawyer.
5. Take any problem terms to your lawyer while you still have time to renegotiate them.
An investor who finds clean documents assumes the rest of the company is run the same way. Messy ones prompt a closer look at everything else.
General information only. Not legal, financial, tax or investment advice.