Legal Considerations Following a Capital Raise (Part 2 of 5): Fundraising and Equity Structuring
Introduction
Many early-stage companies focus on growth and fundraising but overlook legal risks until they become a problem. A solid legal foundation helps avoid costly mistakes, protects your company’s assets, and ensures you’re prepared for investors, employees, and regulators.
Common Legal Pitfalls Growth Companies Face
- Raising capital without clear founder agreements, leading to disputes
- Granting equity without proper documentation, causing cap table confusion
- Signing unfavorable contracts with customers, vendors, or investors
- Ignoring employment and intellectual property (IP) protections
- Expanding internationally without considering regulatory implications
The five key legal areas covered in this series are:
- Employee Stock Ownership Plans (ESOPs) and Incentive Plans (available via this link)
- Fundraising and Equity Structuring (this article)
- Founder and Shareholder Agreements
- Regulatory and Compliance Considerations
- Exit Strategies and M&A Considerations
This second installment will take a deeper look into Fundraising and Equity Structuring.
Legal Considerations Following a Capital Raise (Part 2 of 5): Fundraising and Equity Structuring
Fundraising is often viewed as a sign of success and momentum – but the legal structuring behind the raise is just as important as the capital itself. From the type of securities offered to the rights granted to investors, the way a fundraising round is structured has long-term implications for ownership, control, and future flexibility. Whether you are preparing for your first seed round or a later-stage Series B, a thoughtful approach to equity structuring is essential to avoid pitfalls and set the company up for sustainable growth.
In Hong Kong and across Asia, where legal systems, investor expectations, and regulatory regimes can vary widely, a one-size-fits-all approach does not work. Founders must tailor their strategy to local conditions while remaining globally competitive, particularly if they plan to raise capital from international investors or through pooled vehicles.
Choosing the Right Investment Instruments
Early-stage companies in Asia typically raise capital through instruments like convertible notes, SAFEs (Simple Agreements for Future Equity), or direct equity issuances. Each option carries distinct legal and financial implications:
- Convertible Notes: Common in Hong Kong and Singapore, convertible notes provide speed and flexibility. Founders should consider applicable interest rate rules and ensure enforceable conversion mechanics under their company’s constitutional documents.
- SAFEs: Increasingly used in the region, SAFEs offer simplicity but remain legally untested in some Asian jurisdictions. In Hong Kong, they should be carefully drafted to avoid ambiguity or mischaracterization as a debt instrument.
- Equity Issuances: A traditional priced round offers clarity on valuation and investor rights. However, under Hong Kong’s Companies Ordinance, issuing new shares typically requires shareholder approval and may involve amending the Articles to reflect new share classes or rights.
Using LPFs to Pool Investor Capital
For companies or founders seeking to raise capital from multiple backers – particularly family offices, high-net-worth individuals, or early-stage venture investors – the Hong Kong Limited Partnership Fund (LPF) regime offers a flexible and tax-efficient vehicle to pool investment funds. LPFs are commonly used to:
- Aggregate capital from multiple investors into a single investment vehicle
- Deploy pooled capital into an operating company (e.g., a startup or portfolio company)
- Provide limited partners with exposure to a specific investment strategy or asset class
An LPF can serve as a feeder fund or co-investment vehicle, offering founders and early investors a streamlined structure that avoids putting everyone directly on the cap table. For companies with long-term ambitions to raise from institutional investors or expand regionally, using an LPF as a capital-raising conduit can simplify governance and improve investor alignment.
Hong Kong’s LPF regime, launched in 2020, is specifically designed to attract private capital managers and startups by offering:
- Contractual flexibility in profit sharing and governance
- No legal personality (with the general partner holding legal title)
- Tax exemptions under Hong Kong’s fund exemption regime, subject to conditions
- Compatibility with offshore fund structures or holding company models
In practice, LPFs are increasingly being used as investment syndicate vehicles, sidecar funds, or venture builder platforms in the early stages of fundraising, especially where investors prefer a managed or pooled structure.
Valuation and Cap Table Considerations
Valuation is often the most heavily negotiated aspect of a fundraising round, and it directly impacts ownership dilution and control. In Asia, valuation discussions can be influenced by market norms and investor expectations, particularly from regional venture funds or strategic investors.
When pooling capital through an LPF or similar vehicle, only the general partner (or a nominee entity) typically appears on the company’s cap table, helping to simplify shareholder dynamics. However, founders must still model dilution scenarios and ensure that any LP interests issued upstream are aligned with the downstream equity structure of the operating company.
Investor Rights and Protections
Investors in Asia—particularly institutional investors—will often insist on certain rights as a condition of their investment. These may include:
(1) Liquidation Preferences: Common in Hong Kong, often 1x non-participating, though participating preferences are sometimes requested by regional funds.
(2) Anti-Dilution Protections: Full ratchet or weighted-average formulas are standard, and companies must ensure their Articles reflect these accurately.
(3) Board Representation: Board seats or observer rights are typical, and must be documented in shareholders’ agreements and board minutes in accordance with local company law.
(4) Information Rights: In Hong Kong, investors expect quarterly or annual financial reporting, which must comply with relevant data privacy and accounting standards.
Founders must be careful not to give away excessive control or rights that might deter future investors or lead to deadlock in decision-making.
Documentation and Governance
Well-drafted investment documentation is critical to ensuring alignment between the company and its investors. In Asia, this typically includes:
(1) Term Sheet: While not always binding, it sets the tone for the deal and should be reviewed carefully to avoid surprises in the definitive documents.
(2) Subscription Agreement: Governs the mechanics of the investment, payment, and share issuance under Hong Kong company law.
(3) Shareholders’ Agreement: This is where most of the key commercial terms—governance, exit, transfer rights—are captured. Local counsel must ensure the SHA does not conflict with the Articles or local law.
(4) Updated Articles of Association: In Hong Kong, any special rights or class shares can be reflected in the company’s Articles to ensure legal effectiveness.
Attention to corporate governance—especially in founder-led companies—is essential to maintain investor confidence and prepare for future funding rounds or exits.
Best Practices for Structuring a Capital Raise
To minimize risk and maximize flexibility, companies should:
- Begin legal structuring early—ideally before investor discussions begin
- Model dilution scenarios with realistic local valuation benchmarks
- Consider whether a Hong Kong LPF or pooled investment vehicle is suitable for investor syndication
- Align fundraising terms with long-term goals, including ESOP allocations and exit planning
- Ensure all documentation complies with Hong Kong law and is coordinated across jurisdictions
- Maintain transparency with existing shareholders, employees, and advisors
How DCLO Can Help
At David Cameron Law Office (DCLO), we advise growth-stage companies across Hong Kong and Asia on fundraising and equity structuring. Whether you are raising capital directly, pooling funds through a Hong Kong LPF, or managing a cross-border investment round, we help ensure your structure is clean, compliant, and aligned with your long-term goals. We regularly assist with LPF formation, shareholder structuring, and investor negotiation to create scalable, investor-friendly frameworks.
Looking Ahead
In the next article of this five-part series, we will explore founder and shareholder agreements, including how to avoid misalignment, manage disputes, and protect founder equity over the long term.
