Start-up & Venture Capital

A start-up is not simply a new company. According to entrepreneur and academic Steve Blank, a start-up is a “temporary organisation designed to search for a repeatable and scalable business model.” This distinction matters financially: start-ups are not designed to break even immediately. Their first goal is product development and market share, which means they are constantly raising capital, often from multiple investors across multiple rounds at different valuations and with different instruments.

This creates a layered legal structure that becomes more complex with each funding round. A capitalisation table that starts simple – two or three founders, each with equal shareholding – can quickly become difficult to manage once convertible notes, SAFE instruments, preferred shares, and ESOP allocations are added. Getting the documentation right from the outset avoids costly renegotiations and disputes later.

Equity investments carry the highest level of risk – investors can lose 100% of the amount invested. Targeted due diligence reduces this risk by identifying financial, legal, and operational risks before funds change hands. We help founders prepare for investor scrutiny by addressing compliance gaps in advance, including general tax and compliance obligations that are easily overlooked in the early stages of a company’s life.

Common issues we identify and help resolve include: lack of a system for complying with basic compliance, blockage of share transfers due to the absence of financial statements, unaddressed gaps in corporate documentation, capitalisation tables and statutory corporate records.

For early-stage rounds before a valuation is established, pre-equity instruments offer flexibility for both founders and investors. The instruments most commonly used in Hong Kong are:

• SAFE (Simple Agreement for Future Equity): a right to receive equity in the future upon a qualifying event; the amount invested does not bear Originally developed by Y Combinator in 2013, SAFE instruments have been adapted for Hong Kong startups by platforms such as Zegal. Key negotiated terms include the purchase amount (amount invested), discount rate, and valuation cap.
• Convertible Notes: interest-bearing debt instruments that convert into equity upon a qualifying financing event, liquidity event, or maturity date. Unlike SAFE instruments, convertible notes carry interest and have a defined maturity date, which affects the legal obligations of the company.

We advise founders on the consequences of each option and their impact on the fully diluted capitalisation table, ensuring that the instruments negotiated now do not create unexpected dilution or governance complications at further rounds of capital raising (Series A and up).

A well-drafted term sheet is the road map for a fundraising round. It sets out the economic terms, conditions precedent, due diligence scope, key shareholders agreement provisions, confidentiality obligations, and timeline. Poorly drafted term sheets – or term sheets circulated before they are complete – can compromise negotiations and delay or derail funding.

We regularly assist founders who have already shared an incomplete term sheet with investors and need to regularise the documentation without creating friction. We have also seen cases where the capitalisation table presented to investors contained errors that needed to be corrected before the round could proceed.

Investment agreements formalise the terms agreed in the term sheet after due diligence is complete. For seed rounds, founders often dispense with a full investment agreement if investors do not specifically request one. For Series A and beyond, however, a full suite of documentation is standard.

Shareholders agreements for start-ups typically address the following:

• Corporate governance: who sits on the board, what decisions require investor consent, and what information rights investors receive.
• Founders’ undertakings: lock-up periods, non-competition clauses, and authority to manage the business.
• Transfer of shares: rights of first refusal, anti-dilution protection, tag-along and drag-along rights.
• Liquidity provisions: what happens if the company is acquired or achieves an IPO.
• Deadlock mechanisms: how the parties proceed if the board or shareholders cannot reach a decision.

We have developed a framework for seed and Series A shareholders agreements that reflects the standards of the Hong Kong start-up market, while remaining flexible enough to accommodate the specific negotiating priorities of each round.

ESOPs are a key tool for attracting and retaining talent in a start-up. A well-structured plan gives employees the right to acquire shares in the company at a future date, subject to performance and service conditions. Poorly structured plans – including plans assembled from incompatible templates – can create legal inconsistencies that require significant work to resolve before a funding round or exit.

We offer fixed-fee packages for ESOP documentation, including the board and members’ resolutions required to implement the plan. Turnaround time is five working days from receipt of the required information.

Signing the investment agreements is not the end of the fundraising process. Back-office steps are required to finalise the round: the company secretary must issue the new shares, the capitalisation table must be updated to reflect the new allotment, and the investment must be properly reflected in the company’s books. We coordinate with company secretaries and accountants to ensure these steps are completed without delay.

A start-up typically progresses through several fundraising stages, each with its own legal architecture and documentation package. Slotine calibrates the paperwork to the round profile and to the founder’s negotiating position.

For a deeper treatment of ESOP structures and tax treatment, see our Employee Share Option Plans at a glance. For exit route documentation see the Share Purchase Agreement guide and the earn-outs guide.