Legal and commercial errors that can block an investment round

Legal and commercial errors that can block an investment round

When a company decides to launch an investment round, attention usually focuses on valuation, the equity to be offered, or the growth strategy. However, practice shows that, even before discussing figures, the real filter often lies in the company’s legal position.

The economic negotiation may be well structured, but if the legal framework is not properly organized, the transaction may be delayed, become more costly, or ultimately fail to close.

From a systematic perspective, the risks that most frequently affect an investment round can be grouped into three main categories: regulatory non-compliance, deficiencies in the corporate structure, particularly in the shareholders’ agreement, and contingencies related to the company’s key assets.

Regulatory non-compliance

The first level of analysis is regulatory.

Every company must conduct its business in accordance with the applicable legal and regulatory framework. However, in early stages it is relatively common for certain obligations to be postponed or interpreted with some flexibility. What may seem manageable in day-to-day operations can become a concrete contingency during a due diligence process.

It is common to identify activities subject to administrative authorization carried out without the required license, non-compliance with data protection regulations, contractual terms that do not conform to sector-specific rules, or failure to comply with regulations applicable to regulated industries.

It should be borne in mind that investors assess not only the project’s growth potential, but also the existence of risks that may jeopardize its continuity. A significant administrative sanction, operational restriction, or the nullity of certain contractual provisions may substantially alter the investment scenario.

For this reason, before launching a funding round, it is advisable to verify the level of regulatory compliance and, where necessary, regularize any issues identified.

Corporate structure and shareholders’ agreement

The second block of risks lies within the internal corporate structure. And it is worth emphasizing that, in many cases, the main source of tension is not the articles of association, but the shareholders’ agreement.

The entry of a new investor generally entails a capital increase and a shift in the balance among shareholders. At that stage, the shareholders’ agreement ceases to be merely an internal arrangement among founders and becomes the document that ultimately governs corporate governance, decision-making, and future exit scenarios.

It is common to encounter shareholders’ agreements drafted in early stages without anticipating growth scenarios. Imprecisely drafted drag-along or tag-along clauses, overly broad veto rights, reinforced majorities that hinder future capital increases, economic preferences granted without considering subsequent rounds, or the absence of clear provisions regarding new issuances and incentive plans are frequent issues.

Although a shareholders’ agreement has a contractual nature, its practical impact is decisive. If the internal framework is not properly structured, the entry of a new investor will likely require prior renegotiation. In some cases, that renegotiation proves more complex than the round itself.

In addition, consistency between the shareholders’ agreement and the articles of association is essential. Any misalignment creates legal uncertainty and requires the corporate framework to be adjusted before closing.

Likewise, basic corporate formalities must be reviewed: filing of annual accounts, proper registration of corporate resolutions, updated bylaws, and accurate maintenance of corporate books. Although these may appear to be formal matters, non-compliance conveys a sense of internal disorder.

In short, a poorly structured shareholders’ agreement is not a minor detail; it can become the main obstacle to raising capital.

Key assets and intellectual/industrial property

The third block of analysis concerns the assets that constitute the core value of the company.

In many startups, these assets are intangible: technological developments, software, databases, or trademarks. From a legal standpoint, it is essential to demonstrate that the company holds proper title to these assets or has sufficient rights to exploit them.

In practice, it is common to identify developments created by founders without formal assignment agreements, trademarks or domain names registered in the name of individuals, or the absence of documentation evidencing the transfer of strategic assets to the company.

If ownership is not properly documented, investors may require its regularization as a condition precedent to the investment. Where discrepancies exist among founders or former collaborators, the situation may become significantly more complex.

Considerations for preparing for an investment round

Preparing for an investment round should not be limited to drafting a compelling deck or negotiating valuation. It is advisable to conduct a comprehensive legal review in advance to assess regulatory compliance, alignment between corporate documents and shareholders’ agreements, the company’s corporate and registry status, and the adequate protection of its key assets.

A solid legal structure does not guarantee the success of a funding round, but it significantly reduces the risks that may jeopardize it or weaken the shareholders’ negotiating position.

If you are considering initiating a financing process, reviewing these aspects in advance may facilitate negotiations and strengthen your position vis-à-vis potential investors.

At LetsLaw, we analyze the legal position of each project with the aim of anticipating contingencies and structuring its growth on a sound legal basis.