Wait to Spend Until the Money is in the Bank

When raising money or doing a big corporate deal, it pays to remember that the deal is not done until the money is in the bank.

Big deals require enormous amounts of effort by many people to get done. As you approach the finish line, the pressure builds to jump ahead. However, one should never forget that the deal is not done until all the signatures are collected, and the money is actually in your bank account. To imagine otherwise is tempting but profoundly dangerous.

Imagine this Scenario

Everything seems to be resolved, and the closing date is set. We are on the glide path to getting that funding we have been working hard to secure! Now, we are in a dangerous period where the desire to look “through” the closing is strong so that we can advance in the race to build value. Perhaps we could place that order for the stuff we need or extend that job offer to the hot candidate we want to hire because the money from our funding round is on its way?

What Could Possibly Go Wrong?

Just name it! For illustration, every one of the following incomplete list of possibilities has happened – and, if the team was looking “through” the closing, it could be devastating to the Company:

• Delayed Closing Date:  The lawyers call because someone discovered something was missing in the documents, requiring another round of revisions and review. That means the closing date must be delayed perhaps by a day, perhaps by a week, perhaps longer. I have had my attorneys laugh at us when we were determined to do everything possible to close a venture capital round on time. In that case, we managed to do it by working on the details for weeks. However, the skeptical laughter from people who do deals every day for a living drove home how unusual it is to close on time. That goes to show that closing date delays are more common than not.
  
  
• Last Minute Funds Transfer Brinksmanship:  Finally, it was the closing date! We had four major VCs participating, plus several angel investors. The angels had all returned their signatures and sent in their checks, but on the actual day of the closing, I started getting phone calls from the various VCs asking, “Have you received [the other VCs’] wires yet?”  What? Why does that matter since all four big multi-million dollar investors are sending their wires today, the closing day? Apparently, it did matter, and no one wanted to be the one who sent their wire first. While we managed to receive all four wires that day, I spent hours calling around begging, pleading and cajoling VCs into pulling the trigger on their transfers.
  
  During that process, I learned that sometimes someone has backed out at the last possible moment and not funded as agreed. The thing to know about wire transfers is that once the wire has been sent, the sender has no formal recourse to get that money back (which is why we use wire transfers for big deals in the first place!), and sometimes people have had bad experiences when a deal blew up on the finish line so they are now gun shy about completing your round. I also subsequently talked to entrepreneurs who had investors pull out at the last minute. It does happen. Beware.
  
  
• Something Materially Bad Happens to the Company on the Eve of Closing: Threat of a lawsuit. Touch from a government regulator. Loss of a significant contract. Breakdown with a Major Supplier/partner. Death of a key executive. A pattern of bad management references or discovery of major undisclosed background check issues. Disruptive existing investors. This can be anything that materially damages or changes the investors’ expectations of what they are getting into. Sometimes, the problem can be addressed through quick, transparent disclosure coupled with a coherent plan for mitigating the risk, although there will likely be a delay while more information is sought or possibly there is a renegotiation of valuation. Regardless, the worst thing to do is hide the problem since the person signing the closing documents on behalf of the Company is representing that all material facts have been shared, so hiding material facts can result in legal jeopardy as well as get the relationship(s) off on the wrong foot. Sometimes the problem can kill the deal entirely.
  
  
• Misalignment of Goals:  Sometimes, an existing investor or investor block does not actually want the deal to go through. Once, I had an investor who wanted a fire sale of the Company rather than a new investment round. He did his best to scare off the new investors. Still, he ultimately failed to block our fundraise when the Company’s Board of Directors, other existing investors, and new investors banded together to work through the issue. While we managed to solve the problem at tremendous legal expense and frustration, that situation could easily have killed the deal. I know of other cases where a critical investor killed the Company rather than letting them complete a fundraise.
  
  
• Terrorists Fly Commercial Airlines into Skyscrapers in New York:  I am using this as an example of when something entirely out of your control and unrelated to your business goes terribly, horribly wrong – and everyone freezes. This happened to more than one Company trying to close a funding round on that fateful Tuesday, September 11, 2001. In-progress closings were delayed or canceled as the world tried to figure out what was happening. Investors pushed the pause button as they grappled with the unexpected new information – and anyone who had started spending the money they were expecting was caught flatfooted. Remember, unexpected things sometimes happen. Natural disasters occur. War breaks out. Stock market crashes. It can even be a more gradual crisis like the beginning of the COVID-19 pandemic. You just do not know.

Reality Check

So, do closings blow up all the time? No. Most will actually close once the due diligence hurdles are cleared.

In my experience raising many millions across many funding rounds, all of the rounds eventually got done once the closing was set; however, there was sometimes intense drama and stress along the way.

To cross the finish line, sometimes I had to rely on my key suppliers to stretch our cash just a bit further, pay either via a change in valuation or extensive legal expenses, or spend many hours huddled with counsel, Board members, and investors to resolve some issue before we were done. And I know of other entrepreneurs and investors whose rounds blew up entirely and did not close.

The bottom line is that fundraising entrepreneurs should never forget that the deal is not done until the money is in the bank. Do not trust that everything will come together and keep working on the deal until the end before moving on to the next phase. Be wise and do not spend the money you have not received yet.