The Complicated Logistics of A Close

Fundraising for a startup is hard work. But you have finally reached the moment when you have a term sheet and enough commitments to close. Now, time to spin the many plates and get that fundraising round across the finish line!

While closing a SAFE note can be quite streamlined, closing most early-stage startup funding rounds is a complex dance of moving parts, more so if it is a priced round and somewhat less if it is a convertible note. The first time through can be confusing, so this post will provide an overview of the moving parts as a bit of a roadmap. Note that each situation is unique, and there will be endless nuance and variations along the way.

Cast of Characters

Who are the leading players in this process?

It is a cast of many – generally divided into two sides: the startup company and the investors. The startup’s CEO leads the startup company side. The investor side is led by the lead investor, typically the largest investor in a round, ideally investing 50% or more of the total proceeds. The lead role is often played by a venture capital fund that has more capacity to invest and the confidence to negotiate pricing on a round. Usually, approval by the investment committee of other partners in a venture fund will be a critical final step in authorizing an investment. The pitch (deal memo) making the case for the proposed investment to the investment committee will be developed by the lead partner, and may or may not involve the company representatives presenting to the investment committee.

Most convertible note or priced equity funding rounds involve an investor syndicate, which is a  group of co-investors who are making a joint investment in a startup. Depending on many factors, the investors may include individual angels, angel groups, venture capital funds, strategic investors, and others. The key is that there are multiple investors with different roles in the process. For example, there is likely a lead investor who negotiated the terms of the investment with the company CEO and other syndicate investors signing on to invest on the same terms.

Startup Company Side   Startup Company CEO Other Startup Company officers, like the CFO Startup Company Directors Startup Company’s counsel/legal team Startup Company’s bank

Investor Side   Lead investor Partner Lead investor Associate/Analyst Lead investor investment committee Lead investor back office (finance/legal/administrative) Investor counsel (managed by lead investor) Syndicate investors Investor banks

Sources of Dramatic Tension

Completing a closing is always more complicated and challenging than one would like. The sources of dramatic tension in this process include:

• Note that term sheets can vary in detail, affecting how much remains to be negotiated at later stages in the closing process.
  
  
• Even with a signed term sheet, the glide path (that makes it sound too easy, by the way!) to closing will involve additional due diligence and negotiations as everyone works together to reach the level of agreement that brings the deal across the finish line.
  
  
• The complexity of the transaction multiplies as you add numbers and types of investors to the mix.
  
  
• While almost always everyone is trying to do the right thing, when important legal documents and large amounts of money are involved, the pressure is on to get it right.
  
  
• There is a certain finality to getting all the documents signed and the money transferred that always adds time pressure, making every last-minute change, discovered typo, and missed communication loom large.

The Drama Unfolds

So what does the drama of a close look and feel like? Here are some real-life examples that capture some of the feel of the process:

• “Did you notice that we did not carry through the details on ABC provision from the term sheet into the definitive docs?”
• “We have to get this Disclosure Schedule finalized! Which of our various operational documents are being asked about in this representation/warranty? How fast can we make a list of every contract that involves more than $20,000?”
• “Investor’s counsel is raising a question about …”
• The cap table is set, and someone asks, “Can I invest more money in this close?”
• “Oops, we forgot that [investor] needs a Management Rights letter / to be added to a provision / had a Side Letter.”
• “Investor’s counsel is requesting additional documentation about this item on the Disclosure Schedule.”
• “Reach out to your lead investor to see if you can come to an agreement about how we handle this issue – and does it need to be fully resolved to close, or can we finalize post-close?”
• “Can you confirm that XYZ investor’s shares are eligible for Section 1244 tax treatment?”
• “We can make that last-minute update and run it by opposing counsel.”
• “There is a typo in [investor’s] investment entity.”
• “Have you sent out the wire instructions?”
• “If you make that change, we will have to re-do the per-share price and re-collect all the parties’ signatures.”
• “Are you ready to sign off on the closing?”
• “Has [other big investor’s] wire been initiated? We don’t want to initiate ours until theirs is on the way.”
• “Oh, we cannot do a wire. Where can we drop off a check?” … never mind that the check will take days to clear the banks.
• “This investor’s wire is missing!” … where in the chain did something get messed up?

Better reserve plenty of time in the week(s) as you approach closing for all these items to be addressed!

Tips for Enjoying the Event

• Keep a focus on those remaining conditions to close. These need to be executed professionally to build momentum to close and reassure investors that the startup leaders know how to be good stewards of investor money.

• Have designated contact people to coordinate between the startup company and investor sides of the transaction. Remember that it is inappropriate for anyone other than your counsel (lawyer) to contact the opposing counsel, and it will create legal ethics fits for the lawyers if you cross the proper communication channels. Counsel communicates with counsel. Counsel communicates with their client. Business people on the company or investor side communicate directly with one another. There is an art to this dance!

• Read the draft documents carefully and identify issues early. No one wants to go around the track multiple times if it can be avoided. And the stickier bits may take some back and forth to resolve, so getting those surfaced as soon as possible smoothes out the closing process and minimizes delays.

• Remember that even as tensions run high, keep the bigger picture in mind. Getting the funding in place is the goal so that the startup’s potential can be realized. While you want to sweat the details diligently, try to keep in mind that everyone in this stage is trying for success, and you want to still try to build trust and confidence along the way.
  
  
• Provide clear and comprehensive closing instructions for syndicate investors participating in the round. You want to ensure everyone knows what to expect and what actions you need them to take and that you provide all the information they need to do so. Good instructions provide a good experience and streamline the process for everyone.

• Keep everyone up to date with a shared Google sheet – During the week of closing, tracking investor contact details, legal information like investing entities, amount of commitment, receipt of signatures, receipt of funds, confirmation emails, and other tasks in a shared Google sheet enables multiple people to be working in coordinated harmony while keeping everyone always up to date. The formal documentation comes later!
  
  
• Make liberal use of email cc on your side so that all can track the many moving parts, version changes, and issues resolved.
  
  
• Communicate. Communicate. Communicate. Early and often!
  
  
• Say thank you! A lot! Everyone is working together under pressure to align all the moving parts and accomplish the closing so the company can flourish. This is an exciting time!