Critical Legal Issues at Angel and VC Level During Investment in Technology Startups

Introduction

High return potential also means high risk, and technology startups contain both in abundance. Unfortunately, in commercial practice, we often witness investments being wasted not because of major, unavoidable risks, but because of simple, preventable ones that fail to live up to the term “high risk.”

Although angel and VC groups are generally managed by highly competent professionals, they often struggle to assess “street-level risks” due to various reasons—such as the sheer volume of opportunities they must evaluate, the specialized nature of certain areas, the practical realities of business life, and the unpredictability of human relationships. The unfortunate truth is that many of these risks can only be fully understood after one “tastes” them.

In this article, we will push the boundaries of a lawyer’s perspective and examine seven critical legal points that investors should never overlook when evaluating startup investments.

1. Founder Relations and Shareholding Structure: “Founder Harmony Is the Security of the Investment”

• Is there a “Founders’ Agreement” between the founders?

It is crucial that the relationship among the company’s founding shareholders is formalized through a written agreement. Unclear distribution of duties and responsibilities may later lead to disputes threatening the entire investment structure. Even if such an agreement was not drafted initially (often for innocent reasons), the fact that founders are able to sit together and draft one when the investment opportunity arises is a positive sign of mutual trust and collaboration.

One might ask, “Won’t the investor rewrite all conditions in the investment agreement anyway?” Yes—but the investor must still understand the pre-investment balance regarding work allocation, vesting, what happens if a founder leaves, and other commonly overlooked but critical rules. This is essential both for preparing the investment agreement and for maintaining long-term founder harmony.

• Is the Founders’ Agreement actually implemented or merely signed for show?

The investor must analyze the agreement to determine whether founders truly follow it:— Are duties and responsibilities aligned?— Are contribution ratios reasonable?— Is there hidden dissatisfaction?Clauses such as vesting and performance-based equity allocation reveal whether founders act in line with their contractual commitments.

• What happens to the shares when a founder leaves?

It is common for some founders to leave early. They may have contributed some early work or money, but there is still a long road ahead. If there is no clause addressing what happens to their shares, the startup carries a risk that should have been eliminated from day one. If a startup already addressed this, it signals strong maturity and is a positive note for investors.

2. Establishing a Functional Post-Investment Governance Structure

• Is the “heaviest term sheet” always the best for the investor?

Term sheets and investment agreements often include numerous clauses protecting minority investors. Founders, eager for capital, push back but eventually accept many terms.However, the real question rarely asked is:“Will this governance structure actually allow the company to operate efficiently after the investment?” An overly restrictive agreement may protect the investor on paper but paralyze the startup in practice.

• So what should the post-investment governance structure look like?

This depends on every startup’s specific profile:— the founders’ experience,— whether the business is product-heavy or sales-oriented,— what kind of mentorship or operational guidance is needed, etc.

The investor must invest significant time in understanding founders, their vision, strengths, and weaknesses. Only then can they determine the right governance model—board presence, CEO selection, oversight powers, veto rights, signing authority, decision thresholds, etc.

Embedding this structure into the articles of association is essential to eliminate unpredictable risks.

3. Intellectual Property Rights: “Who Owns the Code?”

• Does the company truly own the technology and software forming the basis of the investment?

IP is often assumed to mean only trademarks or patents. In tech startups, however, software and know-how are usually far more critical.

Most startups fail to structure IP ownership properly from day one. Investors often detect this risk only at the investment stage. Yet, freelance developers or non-payroll contributors may hold residual rights that cannot be easily transferred later.

Valid, enforceable agreements must exist transferring all IP rights from founders and contributors to the company. Otherwise, the investment is built on legally fragile assets.

• Do third-party rights, licenses or open-source components create commercial risks?

A detailed IP audit is essential to confirm:— no infringement of third-party rights,— proper registration of industrial rights where applicable,— appropriate confidentiality protections,— human authorship in AI-generated content (to ensure copyrightability).

This is a specialized legal analysis that is often underestimated.

4. Data Protection & Regulatory Compliance: “Audit Today, Avoid Penalties Tomorrow”

• Is there a startup-specific KVKK (GDPR-equivalent) compliance analysis?

Especially in SaaS and AI startups, data processing falls under GDPR/KVKK. Determining what personal data is processed, for which clients, under which legal bases and safeguards is not a simple legal checklist—it is a custom audit. Using generic templates is dangerous. A startup-specific data protection assessment is mandatory.

• AI usage and its IP implications

— Are the AI tools used truly open-source?— Does the startup’s product comply with EU AI Act-type regulations?These risks are often overlooked but increasingly critical.

5. Commercial Contracts: “Revenue Lives Inside the Contract”

• Great churn rate, but what contract secures the revenue?

If revenue is not supported by actual signed contracts, it exists only in the pitch deck.Investors should ask:— Are customer contracts signed, enforceable, and long-term?— Or are they merely informal agreements via WhatsApp?

A B2B startup’s customer contracts must include minimum elements: duration, termination rules, SLAs, data security, penalties for delay, dispute resolution, etc.

“Don’t worry, our relationship with the customer is great” is a red flag—investors rely on legal security, not good relationships.

• Are these contracts effective in real crises, not just on good days?

The true value of a contract appears when payment is delayed.If collection mechanisms are unclear, MRR is merely “a sum of good intentions.”

6. Legal Condition & Transparency: “What Can You See Through the Dust?”

Startups move fast—so fast that paperwork sometimes gets left behind.Investors must ask:

• How updated are the financial statements?

Are records:— current?— verifiable?— properly categorized?If not, investor expectations may rest on optimistic assumptions.

• Do you have access to company books and information?

This must be written into the agreement, not based on trust.

• Do you have veto rights, audit rights, and access to key contracts?

Without these, you are not an investor—you are a spectator.

7. Exit Strategies: “Is There a Clear Path to Return?”

• Exit strategies must be tailored to each specific deal

VCs usually have institutional exit timelines, but founders rarely consider them.This mismatch leads to conflict years later.

• “No one should fool themselves”

Investors must openly discuss founders’ expectations and exit thresholds.This reveals whether founders are realistic about valuation and long-term potential.

Exit misalignment is a litmus test for both parties.

Conclusion

In technology startups, where everything changes rapidly, investing in the right company is never a guarantee of return unless the legal foundation is strong.Investment decisions must be based not only on potential profitability but also on a thorough legal due-diligence process.For investors, a comprehensive legal analysis of the startup’s entire structure is essential before making any investment decision.