Before You Raise Capital, Get Your House in Order

What matters most to equity investors and lenders, and how start-ups can position themselves for a successful capital raise.

So far, so good. The pitch lands, the investor likes the numbers, and a call to discuss a term sheet is pencilled in for the following week. Then the due diligence questionnaire arrives.

Who owns the code written by the freelance developer in the company's first summer? Why does a co-founder who left eighteen months ago still hold 30% of the shares? Where are the signed customer contracts? And why are some of the shares registered to a friend of the founder, under a side agreement nobody can now find?

None of these questions is unusual. Each can be answered. But answering them can take weeks, and by the time the answers arrive the round can be smaller, the valuation lower, and the investor is asking for protections the founders had not anticipated.

The obstacles that slow a fundraising are rarely about the product or the market. They are legal and structural problems created, quietly and usually with the best of intentions, in a company's first year or two. They surface at the moment the company can least afford delay, and they are the same whether the money is coming from an angel, a venture fund, a bank or one of the private credit funds that have grown rapidly in recent years and now finance everything from start-ups to AI infrastructure. More choice of funder has not meant less scrutiny.

Raising Capital: Two Kinds of Money

It helps to start with what each kind of funder wants, because almost everything about how they behave follows from there.

An equity investor buys a share of the company. If the business fails, the investor usually loses most of its money. If it succeeds, the upside is, in principle, unlimited. The investor's question is therefore whether the company could become very valuable, and whether its slice of that value will be protected.

A lender is owed a fixed sum and interest, however well the company does. Its question is narrower: if things go wrong, how will the loan be repaid?

Between the two sit convertible loans and SAFEs (Simple Agreements for Future Equity), which turn into shares at a later round, usually at a discount or subject to a cap on the valuation. They are popular because they can be relatively quick to implement and postpone the most awkward conversation in any early round, which is what the company is worth. They do not postpone diligence. And unlike a SAFE, a convertible loan has a repayment date: if it arrives before the next round, the loan may become a debt the company has to repay, unless it converts or is extended.

Whatever the instrument, start-ups begin at a disadvantage. Their most valuable assets are usually intangible: software, data, a brand and the people who built them. Revenue is short-lived and hard to forecast, and many are spending ahead of income by design. That is why bank debt is often out of reach until a business is trading profitably.

They also tend to arrive at their first serious round with their paperwork in disarray. In a young company, speed matters more than documents, and between co-founders who trust each other, asking for paperwork can feel faintly insulting. The cost of that arrives later, and often at the least opportune moment, when the fledgling business is grappling with a cash crunch.

What Investors Check

Investors begin with the commercial case: the team, the market and whether each sale makes money. Once they are interested, the lawyers and accountants arrive, and the question shifts from whether the business is good to whether the company is in a fit state to receive the money.

The first stop is the capitalisation table, or cap table, which records who owns what. Investors want it to be accurate, simple and consistent with the company's constitutional documents and registers. Shares promised to an adviser in an email but never issued, options handed out without a plan, a departed co-founder sitting on a large stake: each creates doubt about who will own the company after the round. Investors price doubt.

That is why they look closely at founder vesting. Vesting means a founder earns their shares over time rather than owning all of them outright on day one. If four founders each take 25% and one leaves after three months, the other three may spend years building value for a former colleague. Investors frequently make vesting, or re-vesting of shares already issued, a condition of investing.

Next comes intellectual property, which for many start-ups is the business. Investors will want written evidence that the code, the brand and the data belong to the company rather than to a founder personally, an outsourced agency or the freelancer from that first summer. The default rules on who owns work created by employees and contractors vary between legal systems and are often not what founders assume. A signed assignment is the cleanest answer. Obtaining one from someone who left on bad terms can be slow, and occasionally expensive.

Finally, the lawyers will read the key contracts, looking in particular for change of control clauses that would let a customer or supplier walk away when ownership changes, and check that the company holds the licences it needs, employs its staff properly and handles personal data lawfully.

The Terms

Once diligence is under way, attention turns to the term sheet, and here founders tend to look at one number.

Founders typically want to focus on what the company is (or will be) worth. The more useful question is usually what the investor gets if things go only moderately well.

The answer lies in a handful of provisions. A liquidation preference gives the investor the right to its money back, or a multiple of it, before other shareholders receive anything on a sale. Anti-dilution protection adjusts the investor's position if a later round is priced lower. Reserved matters require the investor's consent for decisions such as issuing new shares or selling the business. Drag-along rights allow a majority to require minority shareholders to join a sale; tag-along rights allow minorities to join one.

These are legitimate protections, and most are market standard. The point is calibration, and a simple example shows why.

Imagine an investor pays US$5 million for 25% of a company, which is later sold for US$12 million. With a standard 1x non-participating preference, the investor takes the greater of its money back or its 25% share. Here that is US$5 million, leaving US$7 million for the founders and everyone else. With a 2x participating preference, the investor first takes US$10 million and then 25% of what is left, US$10.5 million in all, leaving US$1.5 million for everyone else.

Same valuation, very different deal.

What Lenders Want

If investors are asking how big this could get, lenders are asking how reliably they will be repaid. Their diligence is narrower but, on the points that matter to them, often more detailed.

It starts with cash flow: management accounts, forecasts and, where they exist, audited accounts, tested against the cost of servicing the loan. Then comes security. Start-ups rarely own property, so lenders look instead to receivables, bank accounts, intellectual property and the founders' or holding company's shares in the borrower. Each kind of asset has its own formalities, and security that has not been properly created or registered may be worth very little if the borrower fails.

Where the company offers limited comfort, lenders often ask the founders for personal guarantees. That gives the lender additional security, but the founder gives up some of the protection that limited liability would otherwise provide. My advice is to treat a guarantee as what it is, a personal promise to pay, and to know whether it is capped and when it falls away.

The loan agreement will also contain covenants, which are promises about how the business will be run while the loan is outstanding: minimum cash levels, regular reporting, limits on further borrowing. Breaching one is usually an event of default, often after a grace or cure period, which allows the lender to demand early repayment, and a change of control often is too. Because those terms can constrain the next equity round, they are worth negotiating with that round in mind.

Beyond the Bank: Venture Debt and Private Credit

Bank lending is often out of reach until a business is trading profitably. For companies that do not yet meet traditional criteria, venture debt funds and the wider private credit market offer an alternative. The deals that make headlines, financing data centres and computing hardware for AI, are on another scale altogether. For most founders, private credit in practice means venture debt: smaller facilities, usually provided alongside or shortly after an equity round, to companies with strong investor backing or meaningful recurring revenue.

The questions are the ones any lender asks, with a different emphasis. Some lenders lend against recurring revenue rather than profit, and will study renewal rates and customer concentration closely. For hardware-heavy businesses, they will ask how quickly the collateral may lose value as technology moves on. Pricing reflects the higher risk, and the overall cost may include fees, warrants and payment-in-kind interest, which is added to the loan rather than paid in cash.

The terms that matter most are often not the headline rate but the fees for repaying early, any requirement to use surplus cash to pay down the loan, and how much headroom the covenants allow. Agreeing realistic headroom at the outset, and keeping the lender informed, generally makes it easier to adjust if plans change.

Where the Company Sits

Some of the most time-consuming problems in a funding round concern not the business but its structure.

Institutional investors and lenders prefer to invest in a company incorporated under a company law they know, one that comfortably accommodates preference shares, options, convertible instruments and vesting, and whose courts or arbitral rules they trust. Where the operating company does not fit that description, they may ask for a new holding company to be placed above it. Doing that once investors are at the table adds cost and delay, and can have tax, employment and licensing consequences. The time to think about structure is before the first serious round, not during it.

The UAE Angle

In the UAE, the question of where a company sits is more layered than in most countries, because founders have not one legal system to choose from but several. A business may be established onshore, under the federal Commercial Companies Law and an emirate-level licence; in one of the many free zones, each with its own regulations and licensing authority; or in the Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM), which have their own common law-based legal systems and courts that sit in English.

Each works well for the purpose it was designed for. The difficulty arises when a growing group, and the people funding it, need them to work together. Institutional investors often prefer a DIFC or ADGM holding company, or one abroad, because the company law and instruments will be familiar. Onshore company law has been liberalised significantly, but mechanisms such as reverse vesting and option schemes may still need to be structured differently there. A free zone company, including one in the DIFC or ADGM, is generally licensed for its own zone and for business outside the UAE, so dealing directly with onshore customers usually requires an additional permit or licence, or a separate onshore company. Onshore share transfers generally have to be notarised and recorded with the licensing authority, which makes restructuring slower than founders expect. And because the onshore courts generally sit in Arabic and apply UAE civil law, funders often want disputes sent to arbitration or to the DIFC or ADGM Courts, and will ask how a judgment or award would be enforced against onshore assets.

That is not to suggest that one part of the system is better than another, or that onshore and free zone companies cannot raise investment. Many do. It means the choice has consequences, and because the rules continue to evolve, the current position is worth checking with advice before a structure is fixed.

Two further points apply wherever the company sits. Any informal ownership, such as shares held by a nominee or under an undocumented side agreement, will need to be unwound before closing; such arrangements may be unenforceable or, in some jurisdictions including the UAE, unlawful. And raising money is itself regulated. In most jurisdictions, offering shares or promoting investments is subject to securities rules, with exemptions that typically cover private offers to a limited number of professional or sophisticated investors. Advice before a pitch deck is circulated widely costs far less than advice afterwards.

Before You Raise

None of this requires a team of lawyers on retainer from day one. It requires a few hours, early, with someone asking awkward questions, to find the problems while they are still cheap to fix. Before approaching investors or lenders, you should be able to answer yes to most of these:

• Is the cap table accurate, and does it match the company's constitutional documents and registers?

• Are founders' shares documented, with vesting and leaver provisions in place?

• Has everyone who created the company's intellectual property signed it over to the company?

• Are key contracts signed, and have any change of control clauses been identified?

• Does the company hold the licences it needs, and are staff properly employed?

• Is the company incorporated somewhere likely investors will accept, or is a restructuring needed?

• Are the financial records good enough for a lender's review?

• Do the terms of any existing debt, SAFEs or convertible loans allow for the next round?

• Has advice been taken on the rules governing how the company approaches investors?

Fundraising looks like a sales exercise. It is also an audit. Whether the money comes from an angel, a bank or a private credit fund, the funder is checking that the business it likes is the one that actually exists on paper.

The founders with the questionnaire would very likely have closed faster, and on terms closer to those first offered, had their files been in order. A useful test is to imagine an investor's lawyer reading your files tomorrow. Whatever would make them pause is worth fixing today.