Deal Series: Fundraising Without Future Disputes - Why Founders Must Map Historic Promises Before Closing a Round > NEWS

Fundraising rarely begins with a blank sheet of paper.

By the time a company is raising a serious institutional round, it has usually passed through several earlier stages: friends-and-family support, angel investment, SAFEs or convertible instruments, bridge financing, adviser arrangements, strategic introductions and informal founder-led discussions with potential investors.

Some of those arrangements are properly documented. Some are partly documented. Others sit in email threads, call notes, WhatsApp messages or founder memories. Many were made in good faith at a time when the company needed momentum more than process.

That is normal.

It is also one of the main reasons fundraising rounds become more difficult than they need to be.

The Legal Risk Behind Informal Commitments

Founders often focus on the headline terms of a new round: valuation, investment amount, share price, board rights and closing timing. Those terms matter, but they are not assessed in isolation.

A new financing round sits on top of the company's existing legal architecture. That includes constitutional documents, shareholder' agreements, side letters, SAFEs, convertible instruments, advisory arrangements, option plans, transfer restrictions and any investor-specific rights previously granted.

The risk is not limited to formally binding documents. Informal or partially documented commitments can also create practical legal and commercial issues. An investor may believe they were promised pro rata rights. A strategic partner may expect additional upside. A previous investor may have negotiated most-favoured-nation protection. A founder may have given comfort that a future round would preserve a certain ownership percentage.

Even where these positions are not ultimately enforceable as drafted, they can still delay closing, complicate approvals, create disclosure issues, affect investor confidence or force last-minute restructuring.

In fundraising, unenforceable does not always mean irrelevant.

Why Historic Promises Must Be Dealt With Early

The worst time to discover a historic commitment is after the transaction documents have already been circulated.

At that stage, the company has less flexibility. Investors may have obtained internal approvals based on a specific structure. Board and shareholder approvals may already be in motion. The cap table may have been shared. The documents may have been negotiated on the basis that all relevant rights were known and reflected.

A late-discovered commitment can then create a difficult choice. The company may need to reopen documents, issue a separate side letter, seek waivers, adjust the cap table, structure a transfer, provide a commercial clarification or push back and risk a stakeholder dispute.

None of these options is necessarily wrong. The problem is having to choose under pressure to close.

A properly managed fundraiser should therefore begin with a legal mapping exercise before the round architecture is finalised. The company should identify what has been promised, what has been documented, what may be binding, what is commercially sensitive and what needs to be addressed before signing.

What Should Be Reviewed

The review should not be limited to the current draft term sheet. It should cover the full financing history of the company, including:

• existing shareholders' agreements and constitutional documents;
• side letters and investor undertakings;
• SAFEs, convertible notes and warrants;
• pro rata, pre-emption, information, consent and most-favoured nation rights;
• advisory share arrangements and strategic partner economics;
• founder transfer arrangements or secondary sale discussions;
• option pool and ESOP commitments;
• board, shareholder and class consent requirements; and
• prior investor communications that may have created expectations around future participation or treatment.

This is not an academic exercise. It directly affects how the round should be structured.

For example, a most-favoured-nation clause may affect whether a new investor can obtain bespoke rights. A pre-emption process may require notice periods or waivers before new shares are issued. A promised percentage ownership may require careful modelling against the fully diluted cap table. A strategic investor's side arrangement may need to be separated from the main shareholder's agreement to avoid creating rights for the wider class.

Each issue has both a legal and a commercial dimension. The question is not only whether a particular commitment is enforceable. It is whether it can disrupt the financing, unsettle an investor, affect approvals or create future diligence issues.

The Objective Is Control, Not Perfection

Founders should not assume that every historic conversation must be replicated exactly in the new transaction documents. That is rarely realistic and often not advisable.

The objective is to understand the legal and commercial position, then select the cleanest route to closing.

In some cases, the right approach is to honour the commitment in the main financing documents. In others, it may be better handled through a narrowly drafted side letter, a waiver, board approval, a share transfer document, or a commercial clarification.

Sometimes the correct answer is to push back because the requested treatment creates more risk than value.

The key is to make that decision deliberately, with a clear view of the company's existing obligations and the consequences of granting the new rights.

A fundraising process does not need to be perfect to be effective. Real companies are built in motion. They raise capital while hiring, launching, restructuring, entering new markets, dealing with regulators and managing cash flow. The legal process should not ignore that reality. It should organise it.

Why Experienced Fundraising Counsel Matters

Good fundraising counsel should do more than prepare subscription documents.

They should help the company connect the commercial deal to its legal reality. That means reviewing historical rights, testing the cap table, identifying approval requirements, managing side-letter risk, managing investor expectations, and ensuring the round can close without creating avoidable disputes for the next financing.

A successful fundraise is not the only one where money comes in. It is one where the company can continue operating afterwards with a coherent cap table, a manageable governance structure and no avoidable surprises waiting for the next investor diligence exercise.

Founders do not need a perfect history to raise money.

They do need to know what their history contains before they build the next round on top of it.

Disclaimer

This article is for general information only and does not constitute legal, regulatory, tax, financial or other professional advice. Readers should not act, or refrain from acting, based on this article without seeking advice from suitably qualified counsel on their specific circumstances.

Septten Advisors is a UAE-registered legal consultancy advising founders, investors, technology companies, financial services businesses and virtual asset market participants on legal, regulatory, transactional and strategic matters. The content reflects our general views as at the date of publication and may not reflect later legal, regulatory or market developments. No advisor-client relationship is created by reading this article. To the fullest extent permitted by law, Septten Advisors accept no liability for any reliance placed on it.