Founders often talk about “the exit” as if it is an event that happens to a company. In practice, it is something you prepare for, often years in advance, by steadily eliminating legal friction. The two headline exit paths are an IPO and a sale of the company (or a sale of control). They feel very different commercially and emotionally, but from a legal perspective they have far more in common than most teams expect.
In both cases, the company will be put under a microscope. Different people may be doing the reviewing, underwriters and regulators in an IPO, or the buyer’s deal team in an M&A process, but the exercise is the same: diligence. Someone will “kick the tires”, test ownership, test governance, test key contracts, test compliance, and test whether the company has any hidden tripwires that could slow a transaction down or create leverage against it. If the legal foundation is weak, the company pays for it later, either in delays, negotiated concessions, expensive clean ups under time pressure, or a lower valuation.
That is why the best way to think about “exit readiness” is not IPO readiness or buyout readiness. It is simply legal readiness.
And let’s take a step back and ask: is an exit really different from an institutional capital raise? From a legal readiness perspective, no it is not.
A good institutional raise is also a diligence process, simply with a different objective. The investor is not buying the whole company, but they are still buying risk. They still want to understand the cap table, shareholder rights, IP ownership, employment arrangements, litigation exposure, regulatory issues, and whether the company has been run properly.
The difference is mostly about intensity and timing. The later the stage, the more the company has accumulated: more staff, more contracts, more jurisdictions, more subsidiaries, more historical decisions, more custom deal terms, and more stakeholders who can say “no” or demand a bigger share of the upside. By the time an IPO or sale process begins, there is rarely time to rebuild the legal scaffolding from scratch. The deal moves quickly, and the company is expected to be ready.
If you ask founders why companies get messy legally, the answer is usually not that anyone was careless. It is that the company was moving fast, the budget was tight, and the team prioritised shipping product and winning customers. That is a rational choice early on, but the legal consequences often compound quietly.
A few patterns show up repeatedly.
First, the cap table grows in an unstructured way. A company raises small cheques from many individuals, sometimes on different terms, sometimes with side letters, sometimes with promises made in email, and sometimes with incomplete paperwork. Years later, those early holders may be hard to locate, may have passed away, may be in disputes of their own, or may have very different expectations about their rights.
Second, shareholder agreements are drafted for the moment, not for the end game. Early investors may ask for veto rights that feel harmless at the time, but later become a brake on the company’s ability to pivot, raise, sell, or restructure. It is common to see provisions that require the consent of a small shareholder for actions that should be routine, such as issuing shares, amending the ESOP pool, hiring senior talent, approving budgets, changing auditors, or entering into bank facilities.
Third, employment arrangements lag behind reality. Founders hire quickly, often using lightweight offer letters and generic templates. The company’s IP assignment language may be incomplete. Confidentiality terms may be weak. Post termination restrictions may be unenforceable or misaligned with the role. In a buyout or IPO diligence process, gaps here are not theoretical. They go directly to whether the buyer or public investors believe the company owns what it sells and can retain its value after key people leave.
Fourth, governance is treated as “paperwork” until it suddenly becomes “evidence”. Board minutes are skipped. Share issuances are not properly approved. Companies do not keep clean registers. Subsidiaries are opened in a rush and then forgotten. Loans are advanced informally without proper documentation. In a diligence process, these gaps do not simply create admin work. They create questions. Questions slow deals down, and in a deal process, time is money.
The central idea: you will have to fix it eventually, so why not fix it now
Most legal clean ups are not hard because they are technically complex. They are hard because they are politically and emotionally awkward. The longer you wait, the more stakeholders are involved and the more value is at stake.
A simple example is a cap table clean up. Early on, if a small investor is no longer aligned with the company and is happy to part ways, a buyback or restructure can often be negotiated on friendly terms, with goodwill and commercial reasonableness. Years later, once an IPO or sale is on the horizon, the same investor sees the finish line too. They may be far less flexible, more demanding, or simply unresponsive, but still legally required in a consent chain.
Corporate partner Matthew Love observes “We’re acting right now for a number of companies that are past startup mode and gearing up for their first institutional raise. The smartest teams start early and treat legal readiness as an ongoing process, not a last minute clean up. A simple example is fixing cap table friction now by consolidating small legacy holders and tightening transfer mechanics, rather than discovering during diligence that you need consents from people you can’t even reach.”
The same applies to governance corrections. If you tidy up historic approvals now, it looks like normal housekeeping. If you try to tidy up during an IPO or sale process, it looks like the company is scrambling because it is not ready. That difference in optics matters, particularly when the other side is deciding how much risk premium to price in.
So what should you do now?
If you are past the “two founders and a pitch deck” phase, and you are moving into scaling and institutional capital, this is the window where getting legally tidy is still relatively painless. Here are the main areas we see creating friction later.
1. Shareholders agreement and investor rights
The goal is not to remove investor protections. The goal is to ensure the company can still run and still exit.
Start by identifying provisions that create blockers later. These often include overly broad reserved matters, especially where consent thresholds are low and the group with the veto is fragmented. It is one thing to require investor consent for issuing a new class of shares. It is another to require it for ordinary operational steps, changes to employee equity pools, routine borrowing, or any transaction above a low monetary threshold.
Another common issue is misaligned transfer mechanics. Rights of first refusal, co sale rights, and consent requirements can be sensible, but they need to be drafted with exits in mind. If every shareholder can slow down a transfer, secondaries become hard. If drag along rights are unclear, a sale can become contentious. If tag along rights are drafted in a way that forces an acquirer to buy everyone, the acquirer may simply walk away.
Finally, check whether the document is internally coherent with the company’s constitutional documents and equity incentives. Misalignment here is where unpleasant surprises often arise. For example, an ESOP is created, but the shareholder agreement does not clearly address how option holders are treated in a drag along scenario, or who has the power to allocate equity at board level.
2. Current financings and “the stuff that sits in the background”
Most scaling companies accumulate instruments that sit quietly until a trigger event forces them into daylight: SAFEs, convertible notes, venture debt, shareholder loans, revenue based financing, and informal bridge advances.
Before an institutional raise or exit process, you want a single clean view of what is outstanding and what happens in each scenario. What converts when. At what cap. With what discount. Whether there are most favoured nation provisions. Whether there are information rights that could create unwanted disclosure obligations. Whether any note has a change of control repayment premium. Whether any debt has covenants that could be tripped by a reorganisation or sale.
A very practical mistake we see is that teams assume these instruments are “standard”, but each one has small custom variations that create edge case risk. That risk may not matter day to day. It matters when someone is calculating purchase price allocation, working out fully diluted ownership, or deciding whether third party consents are required.
3. Past corporate governance, and fixing yesterday’s paperwork
This is where companies often save money early and pay much more later.
If shares were issued without proper approvals, fix it. If board meetings were not properly documented, recreate minutes to the extent possible and adopt ratification resolutions where appropriate. If registers are incomplete, update them. If filings were missed, plan a remediation path.
In an exit or institutional raise diligence process, the legal team is trying to prove that the company’s equity is validly issued and fully owned, and that the company has authority to do what it says it can do. If those basics are shaky, everything becomes harder, including the ability to give customary warranties, to provide closing deliverables on time, and to avoid broad indemnities.
A useful mindset is this: governance is not bureaucracy. It is transaction infrastructure.
4. Employees, incentives, and protecting the company’s value
Employees are not only a people issue. In diligence, they are an asset protection issue.
Employment agreements should do a few things clearly. They should contain robust confidentiality obligations. They should assign IP to the company in a way that fits the respective business, including inventions created during employment and work product created using company resources. They should address conflicts of interest and outside work. They should handle termination cleanly, including notice, garden leave where relevant, and clear return of property and information.
Then there is the incentives layer. Equity incentives are a retention tool, but they also become part of the company’s capital structure. The documentation should be consistent, the board approvals should be in order, and the vesting and leaver provisions should be aligned with the company’s culture and investor expectations. If you do not plan this carefully, incentives can become a source of dispute precisely when the company is trying to close a financing or sell.
One practical example: a company grants options informally to a senior hire and the person later leaves. If the documentation is unclear, the company may face a claim at exactly the moment it is trying to present itself as stable and transaction ready. These are avoidable scenarios, but only if the company treats employment and incentives as core legal infrastructure, not templates.
5. Other areas worth attention
Even if you focus only on the four pillars above, you will make major progress. That said, two or three additional areas often matter just as much in a real diligence process.
IP ownership and chain of title. If the product is the value, the buyer or IPO investors need confidence that the company owns it. That means clean assignments from founders, contractors, and key developers, and clarity around open source usage and licensing.
Material commercial contracts. Know what your key customer, supplier, and platform agreements say about change of control, assignment, termination rights, and non compete restrictions. A contract that can be terminated on a sale of the company is a hidden valuation risk.
Regulatory and compliance posture. This varies by industry, but it is increasingly relevant for tech enabled businesses: privacy compliance, marketing claims, financial services perimeter issues, sanctions exposure, and sector specific licensing. Even if the business is not regulated, counterparties will ask whether you have been operating with a reasonable compliance framework.
Disputes and contingent liabilities. If there is a current dispute, it is never “just a nuisance” during a transaction. It becomes a disclosure item and a negotiating lever. A calm early assessment and strategy is almost always cheaper than rushing during a deal process.
Conclusion
A company that is legally tidy is not merely “safer”. It is easier to finance, easier to sell, and easier to scale. The best time to do the work is when you are not under deal pressure, because you can be thoughtful, commercial, and fair. By the time an IPO or buyout is imminent, the same issues are still fixable, but they are no longer easy, and they are rarely cheap.
At DCLO, we help growth companies across Asia turn legal readiness into an operating habit, so that when an institutional raise or exit opportunity arrives, the company can move quickly and confidently, with fewer surprises and stronger leverage at the negotiating table.
