Here are some notes to get you started. I like things well structured because it eliminate disagreements and misunderstandings later. I do know some who wing it on some of these items, just be forewarned that there is always someone sideways in your investment group as you grow for this reason or that so more diligence and structure can avoid misunderstandings:
- You do need a legal entity to invest in. That entity needs a quid pro quo to offer investors. Dollars for units in an LLC or stock in a corporation.
- A business plan - not because you have to over engineer or pretend to know the future but rather because this exercise forces you to think about the business - do you have enough staffing for support or sales? How will you generate revenue and when will you break even? It's just always better to have a plan, even if the market throws you some surprises that invalidate your business plan, it's still better to be diligent with a plan that is kept up to date and revisited often.
- You're going to have to pick an initial valuation. This is sometimes very challenging in the beginning and it is something you should have an opinion on (with some sort of logical justification behind why you chose the valuation). Try to be reasonable and remember that in the end, any valuation you pick is a number your are picking out of your @$$ at some level. :) In other words, don't get too hung up here (easy to say, I know). Your goal is to get the money in the company so you can sustain operations (or grow).
- I'll assume an LLC here -- You will need an operating agreement that identifies aspects of control. The operating agreement should also address allocation of losses for tax purposes. This is an area where you really need legal counsel.
All aspects of control should be reviewed very carefully. Controlling your company isn't like a flag that is set to true or false - rather, it's layer upon layers of control. Here are some examples of control items: (a) issuing of dividends, (b) issuance of additional units for raising additional capital, (c) selling assets and/or the company, (d) liquidation or dissolution of the company, (e) identification and appointment of managers, (f) mergers, (g) amendments to operating agreement, (h) limitation of founders salaries, etc) . Don't wing it here - legal counsel would be wise.
- You will need (optionally) an investment agreement of some sort that, preferably in simple speak, that shows a summary of the company and its market, ownership structure, capital raise amount, use of proceeds, summary of founders background, etc. This is a nice to have (maybe no more than 3-pages) for any investor to look at and potentially share with other investors.
- In some states you have to make sure your investors are accredited (i.e. net worth of greater than $1M). Also, some states have tax credits for qualified business ventures. For example, in NC, the NC Qualified Business Tax Venture credit allows investors to get a $50K credit on their investment in a particular year. That's real money in your investors pockets (they appreciate that).
- You will need to be able to produce K-1's for your investors each year so this may mean you have to have someone more experienced in taxes for your company. You'd be surprised how many tax issues come up, depending on how you are taking money in. You may also want to formally have a review (not an audit) done in certain years to start building a solid history of your financials as the years go by. This will come in handy when talking to other investors, banks, potential acquirers, landlords and other parties in the future.
I think that's probably enough to get you started. It by no means covers everything and I'm sure other members here will have tons more to add.
It's easy to get overwhelmed. Many of these things will become second nature to you on your upcoming journey. Don't let the "mechanical tail" wag the "business dog". Mechanics can be complex and painful sometimes but just remember your focus is growing revenues and attracting investors. Then, you can hand off all the things that give you a headache to someone else!
Best of luck!