If you are raising a Series A Financing (or any priced equity around), US venture capital firms will typically ask you to provide a legal opinion, as one of the closing conditions for a venture capital financing. It is highly unlikely that you would be required to provide a legal opinion in an equity round that is not priced, because those early-stage rounds are typically consummated using SAFEs and convertible notes and with very minimal due diligencing into your company. A request for a legal opinion for a Series A Financing would be stated clearly in the transaction term sheet and typically captured as follows:
“Standard conditions to Closing, including, among other things, satisfactory completion of financial and legal due diligence, qualification of the shares under applicable Blue Sky laws, the filing of a Certificate of Incorporation establishing the rights and preferences of the Series A Preferred, obtaining CFIUS clearance and/or a statement from CFIUS that no further review is necessary, and an opinion of counsel to the Company”
Why Do I Need a Legal Opinion?
Well, in a sense, you actually do not need a legal opinion. A legal opinion is of no real use to a tech start-up except as a condition you need to fulfil to close your Series A financing round and to confirm to your venture capital investors that your start-up is investment-worthy from a legal standpoint. In reality, a legal opinion is of more benefit to your Series A investors and serves to provide additional comfort to them as relates the conclusions contained in a legal opinion. If you get to the point where your lawyer has to issue a legal opinion, there is a great chance that, a due diligence exercise has been concluded and is considered satisfactory.
What is in a Legal Opinion?
Think of a legal opinion, in this context, as a list of legal conclusions that confirms that your company is investment-worthy from a legal standpoint. A legal opinion is provided in the form a letter. The letter will contain legal conclusions on certain legal issues relating to a venture financing transaction. Such legal conclusions will include conclusions on whether a start-up is duly incorporated and is in good standing, whether a start-up has the requisite corporate power and authority to enter and conclude a Series A (or other) financing transaction, whether all required consents have been taken, whether shares have been duly authorised, the accuracy of your capitalisation table and also the enforceability of transaction documents.
Is a Legal Opinion a Standard Document?
Within the context of a venture capital financings, there is a sense in which one can say that the content of a legal opinion is fairly standard. Regardless, the expectation is that counsel would review all corporate and transaction documents before signing off on a legal opinion, using any standard formats. Also, the content of a legal opinion may differ depending on an investor's perception of risk, the outcome of a legal due diligence exercise, the jurisdiction of a venture capital investor and the type of financing transaction involved. A legal opinion issued within the context of a private equity, or debt/structured financing will typically be more elaborate. Also, some venture capital investors will want an opinion that clearly confirms that transaction documents will not result in the liability of a limited partner in the investor's venture capital fund.
Who Should Issue a Legal Opinion
A legal opinion will typically be issued by venture capital counsel advising a start-up on a financing round. The lawyers issuing a legal opinion would be qualified to practice law in the country where your company is domiciled.
Is a Legal Opinion Big Deal?
First off, not all Series A investors ask for a legal opinion as a closing condition. But, yes, a legal opinion can be a big deal. For one, where a Series A investor is asking for one, you can't close your Series A Financing round without a closing legal opinion. Also, if the legal conclusions made by your counsel in the legal opinion, turns out to be wrong, your venture capital investors may be able to sue your lawyers and claim monetary damages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
