TheCase: The legal aspects of investment rounds
We hear a lot about startups and the newly invented methods and tools to develop and expand their activities through several approaches, the most important of which are investment rounds.
Startup owners whose successes we hear about in several economies, including the Kingdom’s, must know about the types and levels of investment rounds and pay attention to their most important legal aspects.
First, we have to define the investment round, where several venture capital investors — sometimes only one — gather with the aim of financing a startup.
It is called an investment round because startups usually collect investments on a permanent basis (investment rounds) until they reach the required and intended profitability.
Rounds are usually divided into primary rounds called pre-seed and seed, which are rounds that individual investors, incubators, and accelerators specialize in. Then there are the subsequent rounds that investors refer to as A, B, and C.
Investment rounds begin with a tour known as the seed, which is often in the stage of thinking about and developing the product to be invested in.
After that comes round A, where the idea is implemented on the ground. There is a specific strategy for development that startup owners are looking to implement through these investment rounds. At this stage, the target group of investors is specific and defined because an investor in this round is looking for huge returns since the risk is high.
Then comes the B round, where the company continues to be successful and has good numbers but is looking to a new horizon of expansion. Indeed, this round is considered one of the most dangerous rounds because it is the stage that takes the company to a higher level of tremendous growth and high returns compared to the previous round.
After that comes the round that venture capitalists, companies, and investment funds are involved in, the C round. The company is expected to be very successful and looking to enter new markets or introducing different products. Often, the goal of this round is to prepare the company for an initial public offering or acquisition by large companies.
Certainly, there are several legal aspects that startup owners should pay attention to as they must first ensure the reliability of all legal documents of the entity, as well as their validity and qualifications to provide the services and activities on which their company’s products are built.
On the other hand, they should also be aware of the importance of legally protecting their ideas and registering their intellectual properties.
I also advise the owners of startups to sign the needed nondisclosure agreements with investors or their representatives to ensure that these ideas will not be illegally exploited.
• Dimah Talal Alsharif is a Saudi lawyer and legal consultant. Twitter: @dimah_alsharif