What are the legal potential issues here?

What are the main legal issues an entrepreneur raising outside financing should be aware of?

• Whether from an angel or venture capitalist. I understand that there is a lot of minutiae just by the nature of any legal agreement especially with money involved, but what's the 90 / 10 of it in non-legalese English? That is, what legal issues should an entrepreneur be aware of before he meets with an actual lawyer?

• Answer:

  Economics and Governance. While not strictly "legal" it's very important to understand the key economic provisions of a venture capital financing.  You need to be familiar with the basic algebra of pre-money valuation + raise = post-money and the ways that basic equation is altered by adjusting the pool, counting convertible debt in the pre money, etc. etc.  Liquidation preference is the other key provision that impacts economics.  Again there is the basic concept of investors getting their money back first in a sale, but the key is understanding how that basic equation gets altered - do they get a multiple of money back?  Once they get money back do they still get a pro rata share of what's left?  When does preferred convert to Common and give up its preference, etc. On the governance side, keep in mind that VC investors generally are buying a minority stake in the business.  As such, they protect their interests through various contractual protections that alter the assumption that majority rules.  Venture financings typically have voting agreements to maintain a negotiated board composition and you need to understand how those work, how they are amended, when/how you can lose your board representation, etc.  In addition to voting agreements, there are generally protective provisions in the agreements that require investor approval before certain major actions; typically things like selling the company, doing a new round of financing, paying out dividends, etc.  Obviously that's just a super high level view, and also assumes a first round of financing where the issues are all investor/founder and you don't have the added fun of intra investor issues that arise in later rounds. Lastly, I'll note that there are LOTS of great resources out there to get educated on the basic terms of a venture capital financing.   Mark Suster has some great posts on the subject, Brad Feld did a whole series on term sheets.  I am also a big fan of the chapter on term sheets in Bussgang's book on the VC industry which is super readable and plain English.  Also, if you're working with an experienced startup lawyer, they should be happy to walk you through a term sheet in detail before your fund raising process.  Most of the firms also have written materials that are plain english and designed for clients with explanations of the key terms.