The founder had genuinely, and reasonably, assumed the hard part was behind him. Angel tax was gone, the investor was interested, the term sheet was signed. What nearly derailed the round in its final weeks had nothing to do with tax at all — it was a valuation basis nobody had bothered to properly document, discovered at the worst possible moment.
A two-year-old B2B software startup had built genuine early traction and secured a term sheet from an institutional seed investor for a meaningful funding round. With angel tax no longer a live concern — the round would close well after the 2024 abolition — the founder, entirely reasonably given the public conversation around the reform, treated the valuation question as largely settled. The round was priced at a valuation the founder considered fair, reflecting the company's growth since a small friends-and-family round raised roughly a year earlier.
Where the Actual Problem Surfaced
During the institutional investor's own due diligence — standard practice for any serious round, entirely separate from any tax authority — its legal team asked a straightforward question: what was the actual basis for the valuation used in that earlier friends-and-family round, and was it properly documented? The honest answer was that it hadn't been — the earlier round had been priced somewhat informally, based on a round number the founder and early investors had agreed on over conversation, with no independent valuation report, no documented methodology, and share certificates that didn't clearly record the basis on which that price had been set.
This wasn't an angel-tax problem — that specific risk genuinely no longer applied. It was a considerably more mundane, but equally real, problem: an institutional investor doing careful diligence wants a clean, defensible capitalisation table with a clear, documented pricing history for every prior round, both to protect their own investment and to ensure the company's records will hold up cleanly in any future round or exit. An undocumented earlier valuation creates genuine ambiguity about the company's actual price history — precisely the kind of loose end a sophisticated investor's legal team is specifically trained to flag and push back on before wiring money.
How Close This Actually Came to Derailing the Round
The investor's counsel raised this as a genuine condition to closing, not a minor administrative note — asking for either a retrospective, properly documented valuation basis for the earlier round, or a specific representation and indemnity from the founders covering any future dispute over that earlier pricing. For a two-founder startup without deep legal resources, resolving this properly, under time pressure with a term sheet's typical exclusivity window ticking down, was a genuinely stressful, avoidable scramble.
How It Actually Got Resolved
The fix was, in the end, straightforward — a retrospective, properly reasoned valuation report for the earlier round was commissioned on an urgent basis, using a recognised valuation methodology and referencing the company's actual metrics and comparable early-stage benchmarks at that point in time, to create a defensible, documented record after the fact. Combined with cleaned-up share issuance documentation clarifying the actual terms of that earlier round, the investor's diligence concerns were resolved, and the round closed only slightly behind its original timeline.
The Lesson for Any Founder Fundraising Today
This is precisely the kind of gap we flagged in our piece on angel tax's abolition: removing that specific tax risk did not remove the general discipline good fundraising documentation still requires — it just changed which risk shows up if that discipline is skipped. Every funding round, even an early, informal friends-and-family one, deserves a documented valuation basis and properly executed share issuance paperwork from the outset, not because of any specific tax exposure, but because a future, more sophisticated investor's diligence will eventually ask the same basic question this founder got asked: how was this priced, and can you actually show your work?