Fundraising Documents: What Canadian Investors Expect

The Fundraising Document Stack

Raising investment capital requires a specific set of legal documents that define the terms of the investment, protect both founders and investors, and establish governance rules for the company going forward. Canadian investors expect a standard document package that's familiar to them and their lawyers. Deviating from standard terms or using non-standard documents creates friction, delays the closing, and may cause investors to walk away.

The core fundraising documents are the term sheet (non-binding summary of key terms), subscription agreement (the actual investment contract), shareholders agreement (governance and rights), board resolutions (corporate approval), and various certificates and disclosure schedules. For convertible instruments like SAFEs or convertible notes, the document set is simpler but still requires careful attention to terms and investor protections.

Term Sheet: Setting the Framework

The term sheet is a non-binding letter of intent that outlines the key economic and governance terms of the investment. It's typically 5-15 pages and covers valuation, investment amount, liquidation preference, board composition, voting rights, anti-dilution protection, and other key terms. The term sheet is negotiated before spending money on legal documentation, allowing both parties to agree on major terms before incurring legal costs.

Key Economic Terms

The most important economic terms in a term sheet are the pre-money valuation (what the company is worth before the investment), investment amount (how much the investor is putting in), and liquidation preference (what the investor gets back in an exit before common shareholders). Standard liquidation preferences are 1x non-participating, meaning the investor gets their money back first, then participates pro rata with common shareholders. Participating preferred (investor gets money back AND participates in remaining proceeds) is investor-friendly and should be avoided if possible.

Other economic terms include anti-dilution protection (adjusting the investor's price if you raise at a lower valuation later), option pool size (how many shares are reserved for employee options), and dividend rights (whether preferred shares receive dividends). For seed rounds, dividends are typically non-cumulative and at board discretion, meaning they're rarely paid.

Governance and Control Terms

Governance terms define how the company will be run after the investment. Key provisions include board composition (how many seats each party gets), protective provisions (matters requiring investor approval), information rights (what financial and operational information investors receive), and drag-along/tag-along rights (what happens in an acquisition).

For seed rounds, investors typically get one board seat or board observer rights, with founders retaining board control. For Series A and later, investors typically get one or more board seats, founders get one or more seats, and there may be independent directors. Protective provisions give investors veto rights over major decisions like selling the company, issuing new shares, taking on debt, or changing the business direction.

Subscription Agreement: The Investment Contract

The subscription agreement is the binding contract under which the investor purchases shares. It includes the purchase price, number of shares, closing conditions, representations and warranties from the company, and investor representations. This is the document that actually transfers money in exchange for shares, making it the most legally significant document in the package.

Representations and Warranties

The company makes extensive representations and warranties (reps and warranties) in the subscription agreement about its legal status, financial condition, intellectual property, contracts, compliance with laws, and other matters. These reps and warranties give investors legal recourse if the company misrepresented material facts. Common reps include that the company is properly incorporated, has authority to enter the agreement, owns its IP, has no undisclosed liabilities, and complies with all applicable laws.

Founders should review reps and warranties carefully because they're personally liable if they knowingly make false representations. If you're uncertain about any rep (for example, whether you own all IP or have all required permits), disclose the issue in a disclosure schedule rather than making a false rep. Investors expect some disclosed exceptions—it's better to disclose than to breach a warranty.

Closing Conditions

The subscription agreement includes conditions that must be satisfied before closing. Common conditions include board and shareholder approval, execution of the shareholders agreement, delivery of legal opinions, completion of due diligence, and no material adverse change. If conditions aren't satisfied, either party can walk away without penalty.

Shareholders Agreement: Governance and Rights

The shareholders agreement (or investors rights agreement) governs the ongoing relationship among shareholders and establishes investor rights. It typically includes information rights, board composition and voting, protective provisions, transfer restrictions, drag-along and tag-along rights, and anti-dilution adjustments. This agreement supplements the articles of incorporation and bylaws by providing additional rights and restrictions.

Information Rights

Investors receive rights to regular financial and operational information. Standard information rights include annual audited financial statements, quarterly unaudited financial statements, annual budgets, and monthly management reports. Major investors may also receive rights to inspect books and records, attend board meetings as observers, and receive notice of material events.

Transfer Restrictions

The shareholders agreement includes restrictions on transferring shares to ensure that shares don't end up with unknown or unwanted parties. Common restrictions include rights of first refusal (company and investors can buy shares before they're sold to outsiders), co-sale rights/tag-along (minority shareholders can participate in sales by major shareholders), and drag-along rights (majority shareholders can force minority shareholders to participate in a sale of the company).

Convertible Instruments: SAFEs and Convertible Notes

Many Canadian seed rounds use convertible instruments—SAFEs (Simple Agreement for Future Equity) or convertible notes—instead of priced equity rounds. Convertible instruments are simpler and cheaper than priced rounds because they defer valuation until a future financing. The investor gives you money now in exchange for the right to convert into shares later at a discount to the next round's price.

SAFE vs. Convertible Note

SAFEs and convertible notes are similar but have key differences. Convertible notes are debt instruments that accrue interest and have a maturity date, while SAFEs are not debt and have no maturity or interest. SAFEs are simpler and more founder-friendly because there's no pressure to raise a priced round before maturity. However, some Canadian investors prefer convertible notes because they're more familiar and provide downside protection (if the company fails, noteholders have priority over SAFE holders).

Key Terms for Convertible Instruments

The key terms in a SAFE or convertible note are the valuation cap (maximum valuation at which the instrument converts), discount rate (typically 15-25% discount to the next round's price), and conversion triggers (what events cause conversion). Standard conversion triggers include a qualified financing (raising a minimum amount at a minimum price), acquisition, or IPO. For convertible notes, you also need to specify the interest rate (typically 2-8%) and maturity date (typically 18-24 months).

Due Diligence and Disclosure

Before closing, investors conduct legal and financial due diligence to verify the company's representations and assess risks. You'll need to provide corporate documents (articles, bylaws, shareholder agreements, board minutes), financial statements, contracts (customer contracts, vendor contracts, leases), IP documentation (patents, trademarks, IP assignments), employment agreements, and compliance documentation (permits, licenses, regulatory filings).

Prepare a data room (physical or virtual) with organized copies of all requested documents. The better organized your data room, the faster due diligence proceeds and the more professional you appear. If due diligence reveals issues (missing IP assignments, unsigned contracts, compliance gaps), address them before closing or disclose them in the disclosure schedule.

Legal Costs and Timeline

Legal costs for fundraising vary based on the complexity of the deal and whether you use standard documents. For a seed round using a SAFE or convertible note, expect $5K-$15K in legal fees. For a priced seed round with full documentation, expect $10K-$30K. For a Series A, expect $30K-$100K or more. Investors typically pay their own legal fees, while the company pays for company counsel.

Timeline from term sheet to closing is typically 4-8 weeks for a priced round, or 1-2 weeks for a SAFE/convertible note. The timeline depends on due diligence complexity, number of investors, and how quickly lawyers work. You can accelerate the process by having your corporate records organized, being responsive to due diligence requests, and using standard documents with minimal negotiation.

Common Mistakes in Fundraising Documents

Non-Standard Terms

Using non-standard terms or heavily negotiating standard provisions creates friction and delays. Canadian investors expect certain standard terms (1x non-participating liquidation preference, broad-based weighted average anti-dilution, standard protective provisions). If you deviate significantly from these norms, investors will push back or walk away. Save your negotiating capital for terms that really matter.

Inadequate IP Assignment

Many startups discover during due diligence that they don't own all their IP because founders or contractors didn't sign IP assignment agreements. This is a deal-killer or requires expensive remediation. Ensure all founders, employees, and contractors have signed IP assignment agreements before fundraising.

Messy Cap Table

A cap table (capitalization table) showing who owns what is essential for fundraising. If your cap table is messy—with unclear ownership, unexercised options, or disputes—investors will be concerned. Clean up your cap table before fundraising by resolving any disputes, documenting all issuances, and using cap table software to track ownership accurately.

The Bottom Line

Fundraising requires a specific set of legal documents that Canadian investors expect. The core documents are the term sheet, subscription agreement, and shareholders agreement, plus various supporting documents. For simpler seed rounds, SAFEs or convertible notes reduce complexity and cost. Prepare for fundraising by organizing your corporate records, cleaning up your cap table, ensuring you own all IP, and using standard terms that investors are familiar with. Budget $10K-$30K for legal costs for a seed round, and expect 4-8 weeks from term sheet to closing. By understanding what investors expect and preparing in advance, you can close your round efficiently and avoid expensive delays or deal-killers.