Private equity moves quickly once a firm decides to write a check. The businesses that close cleanly are the ones that did the work months before a term sheet appeared. For San Diego founders considering a raise or a recapitalization, getting the legal and financial record in order ahead of time is what determines whether diligence takes six weeks or unwinds the deal.
Clean Up the Cap Table First
Investors scrutinize capitalization before almost anything else. Option grants issued without board approval, verbal equity promises to early employees, missing 83(b) elections, and a stock ledger that does not match the spreadsheet all create friction. Every one of those is fixable in advance and expensive to fix under a signed letter of intent. Reconcile the cap table against the stock ledger, board consents, and executed grant agreements, and resolve any promise that was made but never papered.
Get Contracts and Corporate Records Current
Expect a request for every material customer agreement, vendor contract, lease, and license. Missing signature pages, expired agreements still being performed, and contracts without assignment or change of control language give an investor grounds to renegotiate price or to demand consents that may be difficult to obtain. Board minutes, bylaws, operating agreements, and amendments should be complete and internally consistent. If the company has been operating in ways its governing documents do not reflect, fix the documents.
Understand the Structure Before You Negotiate It
- Preferred equity typically carries a liquidation preference, anti-dilution protection, and board seats, each of which affects founder control and proceeds at exit
- Mezzanine or unitranche debt preserves more equity but adds covenants, reporting obligations, and repayment pressure
- A recapitalization often means selling a majority position, so understand how rollover equity is valued and what happens to it in a second sale
The headline valuation matters less than the structure underneath it. Two offers at the same number can produce very different outcomes for a founder.
Negotiate Governance Deliberately
Investors ask for board representation, consent rights over major decisions, and ongoing information rights. Much of that is reasonable. The work is separating decisions that genuinely warrant investor approval, such as new debt, acquisitions, and equity issuances, from ordinary operating decisions like hiring, pricing, and vendor selection. Consent rights drafted too broadly turn routine management into a series of approval requests.
Engage Counsel Before the Letter of Intent
Exclusivity is the moment leverage shifts. Before signing, a founder can negotiate the length of the exclusivity period, expense reimbursement, break-up terms, and how specific the economic terms need to be. After signing, the investor controls the timeline and the founder has no alternative deal to negotiate against. A pre-diligence review surfaces the problems on your schedule instead of the investor's.
Bayside Counsel advises San Diego founders on pre-diligence review, deal structure, and governance negotiation. The most useful time to bring in counsel is before the term sheet, not after.