Hanbridge Partners has recently supported several Korean startup clients through U.S. fundraising transactions. We have also advised a Korean mid-sized company with major U.S. corporate customers on an investment in a U.S. company.

Whether the party is a startup raising capital, commonly referred to as the portfolio company, or an investor such as a venture capital fund or general partner, one document must be reviewed in every transaction: the U.S. company’s Articles of Incorporation or Certificate of Incorporation.

The role and practical importance of a U.S. corporate charter differ from those of Korean corporate formation documents. In a U.S. startup financing, reviewing the investment agreement alone is not enough. The charter amendment, preferred stock structure, option pool, Cap Table, board approvals, and state filings must all be coordinated.

This is particularly important for early-stage startups raising Seed, Pre-Series A, or Series A financing. The rights requested by investors and the company’s ownership structure must be accurately reflected in the relevant documents, which will also serve as the basis for later financing rounds and potential M&A transactions.

Founders frequently ask:

“We understand most of the investment terms, but how should we actually prepare the charter amendment, preferred stock structure, option pool, and Cap Table?”

This article outlines the key concepts and documents commonly reviewed in a U.S. startup financing, regardless of the state in which the company was incorporated.

Why a Charter Amendment May Be Required

A U.S. company’s charter is both its foundational formation document and the primary document establishing the number and classes of shares the company is authorized to issue. When a financing begins, an existing common-stock-only structure may not be sufficient to accommodate the preferred stock rights requested by investors or the option pool needed for future hiring.

One of the first items reviewed is the number of authorized shares. Many startups begin with a relatively simple structure, such as 5,000 or 50,000 authorized shares. Once a financing round begins, however, the company must account for its existing common stock, newly issued preferred stock, the employee stock option pool, and additional shares reserved for future financing.

For example, if a company was initially authorized to issue 10,000 shares but plans to issue 5,000 preferred shares to investors in a Seed round and reserve another 1,000 shares for an option pool, the original capital structure may no longer be sufficient. For this reason, companies often increase their authorized shares to 100,000, 200,000, or another appropriate amount in connection with a financing.

The number of shares should not, however, be increased without a clear basis. In Delaware and certain other states, the number of authorized shares may affect annual franchise tax calculations. The appropriate amount should therefore be determined with reference to the financing size and the company’s future issuance plans.

Reflecting Preferred Stock Terms in the Charter

Startup investors generally invest through preferred stock rather than common stock. Preferred stock is designed to provide investors with specified economic and protective rights.

Typical preferred stock terms may include:

- Dividend rights
- Voting rights
- Conversion rights into common stock
- Liquidation preferences
- nvestor approval rights over major corporate actions
- Protective provisions applicable to later financing rounds or a sale of the company

These rights should not be addressed only in the investment agreement. The classes of stock and the rights attached to them generally must also be reflected in the charter or, depending on the state and corporate structure, in a separate Certificate of Designation.

Founders often confuse these provisions with matters governed by the company’s bylaws. Preferred stock rights are not typically established in the bylaws, which govern the company’s internal management and operating procedures. The company’s share classes and related rights must be properly reflected in the Certificate of Incorporation, Articles of Incorporation, or another legally effective charter filing.

The investment agreement, charter, and Cap Table must reflect the same transaction structure.

Any inconsistency among these documents may create issues during investor due diligence, later financing rounds, or a sale of the company.

Practical Need to Adjust the Option Pool

Early-stage startups commonly use stock options to recruit and retain key employees. Investors are generally familiar with this practice and often review whether an adequate option pool will remain available immediately after the financing.

An option pool equal to approximately 10% of the company’s fully diluted capitalization is frequently discussed in Seed through Series A financings. This level is often viewed as a practical balance between future hiring needs and dilution to the founders.

For example, if the company will have 100,000 fully diluted shares after the financing, the option pool may be established at approximately 10,000 shares. The actual percentage, however, will depend on the company’s hiring plan, existing employee equity arrangements, investor requirements, and the size of the financing round.

An option pool that is too small may limit the company’s ability to recruit key personnel, while an excessively large option pool may create unnecessary founder dilution. The option pool should therefore be designed in connection with the company’s expected hiring needs and the overall financing terms, rather than treated as a standalone numerical exercise.

Updating the Cap Table and Managing the Ownership Structure

A Cap Table is a record of the company’s ownership structure. Investors use it to determine who owns the company, how many shares of common and preferred stock are outstanding, how large the option pool is, and how ownership percentages will change after the financing.

A particularly important concept is fully diluted shares. This generally refers to the company’s total capitalization after taking into account not only outstanding shares but also reserved options, warrants, convertible securities, and other rights that may become equity.

The Cap Table allows the parties to determine the founders’ ownership after dilution, the percentage acquired by the new investor, and whether the option pool is calculated on a pre-money or post-money basis.

The Cap Table serves as the central record connecting the financing terms, employee equity arrangements, future investment rounds, and potential M&A transactions.

Because it is repeatedly used throughout the company’s lifecycle, the Cap Table should be updated accurately at each financing stage.

Key Legal Documents in a Startup Financing

A financing round usually requires the company to update several documents at the same time. The names and structure of these documents may vary depending on the state of incorporation and the terms of the transaction, but the following documents are commonly reviewed.

An Amended and Restated Certificate of Incorporation or Amended and Restated Articles of Incorporation replaces the company’s existing charter with an updated document reflecting the financing structure. It may include the total number of authorized shares, the allocation between common and preferred stock, and the rights attached to the preferred stock. In many cases, the document must be filed with the relevant state authority before it becomes effective.

A Certificate of Designation sets out the rights and terms of a particular class or series of preferred stock. Some states or corporate structures use this document to establish preferred stock terms separately from the primary charter. It is not required in every transaction, and the appropriate approach depends on the company’s state of incorporation and existing charter.

A Board Consent records the board of directors’ approval of the transaction. Charter amendments, preferred stock issuances, option pool increases, and related financing matters generally require formal board approval.

A Stock Purchase Agreement or Subscription Agreement governs the investor’s purchase of shares. It typically includes the investment amount, number of shares issued, price per share, representations and warranties, and closing conditions.

An updated Cap Table reflects the company’s final ownership structure after the financing. It generally shows the pre- and post-financing ownership of the investors, founders, existing shareholders, and option pool.

Summary of Documents Required for Startup Fundraising

 

A financing is not only a process through which capital enters the company. It is also a corporate restructuring process in which the company’s legal documents, capitalization, and ownership relationships are aligned.

If even one document is inconsistent with the agreed transaction, the discrepancy may be identified during due diligence in a later financing round. Early-stage companies should therefore organize these materials carefully from the outset.

How Hanbridge Partners Can Help

Hanbridge Partners assists Korean startups with U.S. entities and Korean investors or companies investing in U.S. businesses with the corporate documentation required for fundraising and investment transactions.

We recently supported two Korean startup clients through fundraising procedures and also reviewed an investment by a Korean mid-sized company in a U.S. business. Through these engagements, we have examined charters, preferred stock structures, option pools, Cap Tables, and board approval documents from both the portfolio company’s and the investor’s perspectives.

Many clients are unfamiliar with how U.S. corporate charters and equity structures differ from those used by Korean companies. Hanbridge Partners reviews whether the economic terms of the investment are properly reflected in the company’s charter and Cap Table, whether the structure may create issues in later financing rounds, and whether any required state filings have been omitted.

Our work focuses on ensuring that the commercial terms agreed by the parties are accurately implemented across the company’s corporate and equity records.

Key Takeaways

A U.S. startup financing is not completed merely by signing an investment agreement. The transaction may also require a charter amendment, preferred stock issuance, option pool adjustment, Cap Table update, board approval, and state filing.

In an early financing round, the equity structure established at closing may affect future fundraising, employee compensation, company valuation, and M&A transactions. Founders and investors should therefore review not only the negotiated investment terms but also how those terms are reflected in the company’s legal documents.

Fundraising is a significant turning point for a startup. Properly organizing the charter and ownership structure strengthens investor confidence and creates a more stable foundation for future financing rounds.

The financing terms, charter, board approvals, and Cap Table should be reviewed as one integrated transaction.