A pattern we see often: a founder has taken five-figure or low-six-figure checks from friends, family, or angel investors. The paperwork is informal — sometimes a one-page handshake document, sometimes a short subscription agreement someone downloaded, sometimes nothing at all. The founder is now talking to institutional investors who want a clean cap table, and the early checks have to be regularized before that round can close.
The problems that surface in diligence
- The investors weren’t accredited. Federal securities exemptions for unregistered offerings generally require accredited investors, especially for any kind of general solicitation. If the founder told friends about the offering at a party or sent a mass email, that may have been a public solicitation that limits the available exemption.
- No Form D was filed. Rule 506 offerings require a federal Form D filing within fifteen days of the first sale. State-level notice filings (the Florida OFR notice if the company is in Florida) are also required.
- The instrument is unclear. A handwritten promise to issue equity, an informal email confirming a percentage, or a one-page note with no maturity or interest rate creates ambiguity about what the investor actually owns.
- The cap-table reflects nothing. The investors are real economic stakeholders but don’t appear on the company’s books in any auditable way.
Our typical cleanup approach
We work through this in three stages.
Stage one: paper what was supposed to happen. For each early investor, we draft a corrected SAFE or convertible note that reflects the parties’ actual intent. The instrument is dated to the original transaction; the founder and investor both sign. This creates a clean instrument in the file.
Stage two: address the securities-law overhang. If the offering exemption available at the time looks shaky, we evaluate options. Sometimes a delayed Form D filing is the right remedy; sometimes a rescission offer to a specific investor is needed; sometimes the situation is salvageable with proper accredited-investor verification and updated paperwork. The analysis is matter-specific.
Stage three: integrate into the new round. The cleaned-up instruments either convert into the new round (preferred when the cap is friendly) or are extinguished in exchange for cash or new equity. Each option has different tax consequences for the investor that should be modeled.
The friends-and-family lesson for new founders
If you’re early enough that no one has invested yet, use a single instrument from day one. A standard post-money SAFE handles five-figure checks just as well as six-figure ones, with no marginal legal cost beyond the founder’s time. Have the investor confirm accredited status in writing before the wire. File Form D within fifteen days.
The cost of doing this right from check one is essentially zero. The cost of doing it wrong is several thousand dollars of cleanup at the worst possible time — when an institutional round’s clock is ticking.
Talk to a Florida Business Lawyer
If you are navigating a transaction with this pattern, schedule a consultation with Montague Law at 904-234-5653 or use the contact form.
Related resources from Montague Law
This case study describes a recurring pattern across multiple matters and does not identify or disclose information about any specific client. It is provided for general informational purposes only and is not legal, tax, or financial advice; reading it does not create an attorney-client relationship. Specific deal numbers, dates, and industry details have been omitted or generalized. Consult counsel for guidance tailored to your facts.
