Key Legal Issues to Consider When Raising Series A Venture Capital After Early-Stage Investment from Individuals

Securing a Series A round of venture capital investment is often a pivotal moment for a company. It usually represents the point at which a business transitions from being an early-stage, angel-backed venture into a more structured, institutional-backed growth company. While attracting early-stage investment from individual investors, such as friends, family and business angels, is common and valuable for getting a company off the ground, raising capital from venture capital (VC) funds introduces a very different set of dynamics and legal considerations.

Below we outline some of the main legal issues to be aware of when preparing for a Series A funding round with institutional investors.

1. Reconciling Existing Shareholder Arrangements with VC Requirements

Individual investors often enter at an early stage with relatively light documentation, perhaps under a simple subscription and shareholders’ agreement, or even just under standardised templates such as SEIS/EIS compliant documents. Venture capital investors, by contrast, will insist on a far more detailed and heavily negotiated shareholders’ agreement, articles of association and investment documentation.

This can create tension if the rights already granted to early investors conflict with what the VC is seeking. For example, individual investors may have pre-emption rights, anti-dilution protections, or board representation which the VC may want to dilute or restructure. It is therefore crucial to review the company’s existing agreements early in the process, so that amendments or waivers can be negotiated with existing shareholders in order to accommodate the VC’s requirements.

2. The Impact on Early Investors and Their Expectations

Angels and other early investors often have strong personal relationships with founders and may expect to retain a degree of influence. However, VCs will usually require these investors to step back, sometimes significantly. They may insist that protective provisions, veto rights or board seats are streamlined to ensure efficient governance.

Founders need to manage these relationships carefully, balancing the need to secure institutional capital with the desire to maintain goodwill and protect the trust of those who supported the business in its infancy. In practice, early investors often have to accept that their influence will be diluted, but they should at least be treated fairly and kept informed throughout the process.

3. Due Diligence and Corporate Housekeeping

VC funds will conduct a rigorous due diligence process before committing capital. This will cover not only financial and commercial matters but also a forensic review of legal compliance and documentation. Any deficiencies in past investment rounds – such as missing Companies House filings, incomplete share registers, or informal shareholder agreements – will be flagged as potential risks.

Founders should therefore undertake a “legal health check” before going out to the market. Ensuring that all historic share issues were properly authorised and documented, that intellectual property is assigned to the company, and that shareholder agreements are valid and enforceable can prevent delays and renegotiations during the Series A process.

4. Negotiating New Investor Protections

VCs typically require a range of protective provisions that go far beyond those negotiated with individual investors. These may include liquidation preferences, anti-dilution rights, drag-along provisions, detailed information rights and reserved matters requiring investor consent. These rights are designed to protect the fund’s investment but can create complex future scenarios, particularly where they interact with rights previously granted to early investors.

It is important for the company to negotiate these provisions carefully, ensuring that they do not unduly restrict future flexibility or deter follow-on investors. Legal advisers play a key role in helping founders understand the long-term implications of these terms and in seeking to achieve a balance that works for both sides.

5. Alignment with SEIS/EIS Tax Relief

Many early-stage investors in UK companies rely on SEIS or EIS tax reliefs. However, some of the provisions sought by VCs can risk jeopardising this relief if not structured properly. For instance, certain preferential rights or redemption features may be incompatible with the qualifying conditions.

It is therefore essential that the legal documentation for the Series A is reviewed with SEIS/EIS compliance in mind, so that the company does not inadvertently cause its early investors to lose valuable tax benefits. In many cases, it will be possible to draft terms in a way that protects both the VC’s commercial interests and the tax status of early investors.

6. Founder Commitments and Warranties

VCs will expect a higher level of accountability from the founders than individual investors might have demanded. This typically includes more extensive warranties, personal undertakings, and sometimes vesting or “good leaver / bad leaver” provisions linked to their shareholdings. These requirements can significantly affect a founder’s position if they later wish to exit the company or reduce their involvement.

Before signing such commitments, founders should carefully consider their long-term intentions and obtain independent legal advice to ensure the terms are fair and proportionate.

Conclusion

The shift from raising capital from individual investors to securing institutional venture capital funding marks a major evolution in a company’s journey. While it opens the door to significant growth and credibility, it also introduces a far greater level of complexity and negotiation. Reconciling the rights of early supporters with the demands of VCs, ensuring legal compliance, and protecting both founder and investor interests all require careful planning and expert advice.

At The Jonathan Lea Network, our team regularly advises on Series A and venture capital transactions, guiding founders through the process of negotiating with institutional investors while safeguarding the position of early shareholders. If you are considering a Series A round or would like to prepare your company for venture capital investment, please do get in touch with us for tailored legal support.