Here’s the second part of my legal guide to startup fundraising in Malaysia. If you’ve missed the first instalment, you can read that here.
1. Get the necessary due diligence done
Usually, sophisticated investors like corporates and venture capitals may need your company to pass their due diligence process before they can invest in your company. Due diligence is one of the hurdles under a clause known as a ‘condition precedent’ that you need to pass before getting the investment.
The due diligence can cover legal, financial and even business due diligence on your company. The investor may engage legal counsel, audit firms, and other independent advisers to advise the investors on your company.
Just take note that due diligence is not compulsory under the law. Investors like venture capitals are putting money managed from other investors to make sure that they are investing in the ‘real deal’. So, if you are dealing with less sophisticated investors like families and friends, you could skip this process altogether and proceed straight to signing the fundraising documents to get the investors to invest in your company.
The legal firm will submit a final report to the venture capital fund’s investment committee or the company’s board to decide whether to invest in your company.
Due diligence can be a deal killer so you better be upfront about your company’s situation if they are things that the investors should know. In other words, the more issues get discovered in due diligence means you will lose more leverage in the fundraising negotiation.
2. Sign the fundraising documents
If the due diligence goes well, the investor will ask you to sign the fundraising documents.
In this discussion, we’ll only cover the usual fundraising documents involved in equity investment. The first document is the investment term sheet. A term sheet may or may not be binding based on the party’s agreement.
Other usual fundraising documents include subscription agreement which covers the terms of the investment like the payment terms (full drawdown or based on certain milestones) and the shareholders’ agreement covering the existing shareholders like cofounders and the new investor.
Although these are the usual documents involved, in some cases, the investment term sheet may even be the only “definitive” document used for the investment. In other words, the usual rights and obligations of the shareholders, including will be covered in one single term sheet.
Different investors may have other preferences when it comes to the fundraising agreements needed. The general rule is that the more sophisticated the investors are like institutional and corporates; the more extensive the documents you need to sign before the investment money is in your company’s bank account.
3. Get the company secretary to prepare the necessary paperwork.
In a fundraising exercise, your company’s company secretary involvement is crucial and also why you need a good company secretary for your startup.
Before a company can issue shares to the investor, the company secretary needs to prepare the usual paperwork like the board and shareholders resolutions. These documents need to be signed by the existing directors and shareholders, giving the company the authority to issue new shares to the investor. In our experience, this is the crucial and formal step that many founders tend to neglect or even ignore completely.
I also know that some angels don’t even bother signing fundraising or any documents because they trust you and all that. In my experience, angels can be unpredictable creatures since the relationship is personal, so nothing beats a good, signed agreement in writing to avoid future regrets and fallout.
Also, suppose you already have a shareholder’s agreement or founders agreement in place. In that case, the contract may also have additional procedures and steps that need to occur (especially if you already have existing investors in the share capital of the company). Since you are a private company, before you can issue shares to a non-shareholder, the usual formalities include getting the existing shareholders to sign a preemptive waiver to issue the shares to a new third-party investor to invest in the company.
4. Get the investor to transfer the investment into the company’s bank account.
After all the paperwork has been signed and executed, the investor now needs to transfer the company’s investment amount.
If your company has been dormant for a while or is fundraising for the first time, it may also be a good idea to tell your bank branch representative that you usually deal with the investment.
Here’s why it’s essential, especially involving a large investment sum. Banks need to do their usual KYC (know your customers) every time new funds come from the investors to come from legitimate sources or even involving foreign investors or the funds are coming from overseas. This so that the monies do not get flagged or queried. So, if you have a signed term sheet with the investor, it may be useful to provide a copy for their reference.
5. Sign the necessary statutory forms and file the paperwork to the regulator.
Once the company secretary confirms that the funds are in the company’s bank account, the company secretary will prepare the necessary filing including the lodgment to the Companies Commission of Malaysia, the regulator for companies in Malaysia.
The company secretary will then issue a form known as a return of allotment of shares. In the document, you will find the current shareholders’ list, including their respective shares, including the investor as another new shareholder.
This article was first posted on Head’s Up, as one of the posts in a six-week series where I am involved as a guest author. Head’s Up is a weekly newsletter that comes out every Monday and Friday on all things SME, startup, and social enterprise in Malaysia (and maybe in the region in time to come).