Introduction: Why Legal Documents Matter in Startup Fundraising
If you're a first-time or immigrant founder preparing to raise capital for your startup in Canada, understanding the legal documents involved in each funding round is crucial. These documents don’t just record who invested and how much—they determine your rights, your responsibilities, and your control of the company moving forward.
This guide breaks down the most important legal documents you’ll likely encounter across three common early-stage funding rounds: Friends & Family, Angel, and Seed. For each round, we explain what documents are typically used, what they mean, and what key terms to pay close attention to.
1. Friends & Family Round
This round often comes first in a startup’s journey and involves funding from people who already trust you—family, friends, or close acquaintances. Despite the informality, it’s important to properly document these deals to avoid misunderstandings and future legal problems.
SAFE (Simple Agreement for Future Equity)
A SAFE is a contract where an investor provides money now in exchange for the right to receive equity later, typically during a future equity round. There is no maturity date, no interest, and no obligation to repay.
Key Terms to Understand:
- Valuation Cap: The maximum valuation at which the investment will convert into equity. A lower cap favors the investor.
- Discount Rate: A percentage discount applied to the price of shares in the future round. Typical discounts are 10–25%.
SAFEs typically convert into preferred shares once a priced round occurs.
Convertible Note
A convertible note is similar to a SAFE but structured as a loan. It includes interest and a repayment date, though it is still intended to convert into equity in the next round.
Key Terms to Understand:
- Interest Rate: Annual interest that accrues on the principal (usually 4–8%).
- Maturity Date: The date by which the note must convert or be repaid.
- Valuation Cap and Discount: Like a SAFE, convertible notes often include both.
Convertible notes also typically convert into preferred shares when the next qualified financing event occurs.
2. Angel Round
Angel investors are typically experienced entrepreneurs or early-stage investors. This round may use more structured documents but still often relies on flexible instruments like SAFEs or convertible notes.
Enhanced SAFEs or Convertible Notes
In this round, investors may request SAFEs or notes with more customized terms to protect their interests.
Key Contract Terms:
- Pro Rata Rights: Gives the investor the right to participate in future rounds to maintain their ownership percentage.
- Most Favored Nation (MFN) Clause: Ensures the investor gets any better terms you might offer to future SAFE investors before conversion.
- Cap and Discount Interaction: Defines how valuation caps and discounts are applied if both exist.
Once converted, these instruments usually result in preferred shares, not common shares, for the investor.
Cap Table and Founder Agreements
By this stage, founders should have a formalized equity structure with:
- A clean and updated cap table that includes all SAFEs, notes, and equity grants.
- Founder reverse vesting agreements to ensure equity is earned over time (e.g., 4-year vesting with 1-year cliff).
- IP Assignment Agreements for all contributors.
Note on Share Types: Founders and early employees typically hold common shares (ordinary shares), which have basic voting rights but fewer protections. Investors, however, almost always receive preferred shares, which come with enhanced rights.
3. Seed Round (Institutional Investors)
In your first priced equity round, professional investors (like seed-stage venture funds) will require a full set of legal documents to formalize their investment and protect their rights. They will be purchasing preferred shares, which come with preferred rights not granted to common shareholders.
Term Sheet
This non-binding summary lays out the basic structure of the deal. While it's not a final agreement, it serves as a blueprint for the binding documents that follow.
Key Contract Terms:
- Pre-Money Valuation: The valuation of your company before the new money comes in.
- Investment Amount: Total funding being committed.
- Liquidation Preference: Preferred shareholders get their investment back before common shareholders in an exit (e.g., 1x non-participating).
- Board Rights: May include a board seat or observer seat for investors.
- Protective Provisions: Veto rights over major company decisions (e.g., issuing new shares, selling the company).
Share Subscription Agreement
This is the formal, binding contract for purchasing shares.
What It Includes:
- Number and class of shares being issued (typically Series Seed Preferred Shares).
- Price per share and payment process.
- Representations and warranties from the company and investor.
Shareholders’ Agreement
This governs how the company is managed and how shareholders interact.
Key Contract Terms:
- Drag-Along Rights: Allow majority shareholders to force minority shareholders to sell in an exit.
- Tag-Along Rights: Allow minority shareholders to join a sale initiated by major shareholders.
- Right of First Refusal (ROFR): Company or other shareholders get the first chance to buy shares before a sale.
- Information Rights: Investors get access to financial updates and performance reports.
- Founder Restrictions: Founders may face restrictions on selling shares or leaving the company prematurely.
These rights generally apply only to preferred shareholders, which gives them stronger protections compared to common shareholders.
Amended Articles of Incorporation
To accommodate preferred shares, you must amend your company’s articles.
Key Updates Include:
- Creation of new share classes (e.g., Series Seed Preferred).
- Definition of rights for each class:
- Conversion Rights: Preferred shares can be converted into common shares, typically at the discretion of the investor or automatically in an IPO.
- Dividends: Preferred shareholders may have the right to receive dividends before common shareholders.
- Voting Rights: Preferred shares may carry equal or enhanced voting power.
Why These Matter: These amendments legally enshrine investor protections and are non-negotiable once adopted.
Conclusion: Legal Docs Define the Deal
Each legal document in your fundraising journey plays a distinct role. From simple SAFEs in your first round to detailed shareholder agreements in your Seed round, understanding these documents empowers you to raise confidently and protect your long-term interests.
Remember: Founders typically hold common shares, while investors hold preferred shares with enhanced rights. These rights can affect board decisions, exit payouts, and the company’s strategic direction.
Before signing anything, make sure you consult with a startup-focused lawyer who can explain the implications of every term in plain language.
How Trustiics Can Help
Through Trustiics, you can access vetted, startup-focused lawyers in Canada who understand the legal and cultural challenges faced by immigrant and first-time founders. Our platform is designed to give you:
- On-demand help with incorporation, founder agreements, or fundraising
- Flat-fee services for legal document review and contract drafting
- Clear explanations of investor rights and startup law in plain language
- Support for Seed and Series A fundraising, including cap table review, term sheet negotiations, and shareholder agreements
You can get started by selecting a lawyer, sending a request that describes your needs, and receiving a free, no-obligation quote. Once approved, you make a secure online payment held in escrow until the service is completed.
Alternatively, contact us at support@trustiics.com, and our support team will coordinate legal services tailored to your startup’s stage and fundraising goals.