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Legal Mistakes Startups Make While Raising Funds
Issuing Preferred Stock
Preferred stock financing is a complicated, time-consuming and expensive process. Until and unless the company plans to raise a substantial amount of fund, say $800,000, they should not opt for preference share. But, if still the company plans to raise fund from private investors and venture funds, it should incorporate with two classes of stock - common and preferred stock. The founders of the business should receive the common stock and preferred stock should be set aside for the future investors in the company. Also, startups are more secure by issuing convertible share to seed investors, not equity. However, if the investor insists on equity, the startup should issue common stock, which will place the investor in the same position as the founder.
