Legal aspects of investment rounds: Part II

Legal aspects of investment rounds: Part II

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In our previous article, we briefly touched on the investment rounds undertaken by startups in order to obtain financing from investors, whether individuals, companies or investment funds, and we also touched on the most important legal aspects that the owners of these startups should pay attention to.
In today’s article, we will discuss a few legal aspects that investors should pay attention to on the other hand.
First, it is the right of the investor to have a clear idea about the priorities of the company during the investment rounds, as it is very important to clarify the uses of the funds to be invested by the startups, such as determining the spending percentages of marketing operations and initiatives, warehousing, and execution, in addition to the working cadres and project expenses overall, even the petty cash to be used for various purposes.
The lack of clarification of these points may cause a lack of clarity of the spending mechanisms, and therefore the investor will not know whether his investment is in the right place or not. Moreover, detailed backup plans should also be drawn up for investors in case the main plans fail or are even delayed.
In addition to the above, the methods of detecting and using cash flow returns should be stated and clarified, so that investors do not provide their money to be kept by the entrepreneurs in the bank as reserve funds, or to be used by the entrepreneurs in additional businesses that have not been agreed upon with the investor.
Certainly, the legal documentation of investment round agreements between investors and owners of startups is a major requirement that cannot be waived, as it is very important to document the expected results in these agreements and to set the standard for item evaluations to ensure fairness and justice.
Furthermore, given that the nature of each plan, each product, and each investor is different from other plans, products and investors, it is very important to document any exceptions that are agreed upon between investors and startups in a way that guarantees the rights of the investor and the company and contributes to each of them understanding the level of expectations placed.
With regard to the mechanisms of evidence in light of the new evidence law in the Kingdom, it will be much easier for the two parties to agree on the evidence mechanism that they hope to rely on in proving their agreements, as this will help in facilitating and accelerating any litigation procedures later.
Also, defining and stating flexible mechanisms for resolving disputes between the two parties will save a lot of effort, time and money, as it is possible to include an amicable mechanism that is linked to a specific time period to resolve the conflict and ensure that matters are not escalated and to ensure the continuity of the project’s success.

• Dimah Talal Alsharif is a Saudi lawyer and legal consultant. Twitter: @dimah_alsharif

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