Legal diligence starts with structure: where the company is incorporated, whether it is in good standing, which entity holds the customers, contracts and IP, and whether the shares being offered can be issued.
10 min read · Level 3
I find a simple diagram of the group - who owns whom, and where the contracts, people and IP sit - does more to prevent legal surprises than any long document review. If the founders cannot draw it confidently, that uncertainty is itself the first finding.
Before examining contracts or IP, confirm what you are buying into.
Question Where to check Does the company legally exist? official company registry Is it in good standing (filings, fees up to date)? registry records or a certificate Where is it incorporated, and why? incorporation documents Which entities are in the group? group structure chart Which entity holds customers, staff and IP? contracts, employment agreements, assignments Can the shares being offered be issued? constitution, shareholder approvals
A common structure for startups raising international capital:
Parent company (for example, incorporated in Delaware or Singapore) - issues shares to investors Operating subsidiary in the founders' home country - employs staff, signs customer contracts
This can work well, but only if the parent actually owns the subsidiary and the valuable assets sit where investors expect.
Because investors receive shares in one specific legal entity. If the customer contracts, staff and IP sit in a different entity the parent does not fully own, investors may own shares in a shell.
Registry checks are cheap, public and reliable - one of the few pieces of diligence based on a true primary source.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: UK Companies House; Delaware Division of Corporations; U.S. SEC - Investor.gov
Structure diligence finds a gap.
Investors buy shares in: Parent Ltd Parent Ltd owns: 100% of Operating Co Customer contracts signed by: Operating Co Core software IP assigned to: Founder personally (never transferred)
The investor makes assignment of the IP to the group, and confirmation of the parent's ownership of Operating Co from the local registry, conditions of closing. Neither is unusual; both are much harder to fix after the money is spent.
Assuming the entity named on the term sheet is the one that owns the business, without tracing where contracts, people and IP actually sit.
Confirm the company exists and is in good standing.
Map every entity and who owns it.
Identify which entity holds customers, staff, IP and licences.
Require structural gaps to be corrected before investing.
At the start of legal diligence on any private company.
Do not rely on this lesson for a legal conclusion about a specific structure; take advice from a qualified lawyer in the relevant jurisdictions.
Startups raising from international investors frequently restructure so that a holding company in a jurisdiction familiar to investors owns the local operating company, and legal advisers and accelerators publish guidance noting that incomplete transfers of shares or IP during such restructurings are a common diligence issue.
Restructurings are routine; incomplete ones are a routine diligence finding.
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