The Founder's Checklist for Early-Stage Financing Rounds
If you are the founder of a company and have signed a term sheet with your lead investor for a seed or early-stage round of SAFEs, convertible debt, or preferred stock, your work is not over yet. The following is a list of action items you can take to help facilitate your transaction and get to a smooth closing.
Pick a closing date.
Pick a realistic closing date for the transaction. The date will depend in part on the type and complexity of the transaction, the number of investors involved, the level of sophistication of the investors involved, and any number of other factors. If your transaction is relatively straight forward with only a few investors, a closing date two weeks out might work. If your transaction is more complicated with several parties involved, consider a closing date that is four to six weeks out.
Line up your investors.
As soon as possible, determine who your investors are for your initial closing and how much money each of them will be investing. Keep in mind that this can sometimes take longer than you might think. Institutional investors may have to get approval from their partners or investment committees prior to making a commitment. Angel investors may need to consult with their financial advisors or tax counsel. In any event, try to understand each investors' decision-making process and timeline and be sure to follow up until you lock in your initial closing.
If you have current investors with participation rights, make sure you are following the notice provisions in their rights agreements. Some notice provisions may give the investor as much as twenty days to decide if they are going to be participating. If that timeline is beyond your initial closing date, make sure you are leaving enough room in the round to accommodate those investors if they chose to invest their pro rata.
Line up your board and shareholders.
Prior to closing your transaction, you will need board approval and in some cases shareholder approval as well. (For limited liability companies, the managers and members will need to approve.) Make sure whoever you need to approve the transaction is aware of the transaction and the closing date and has the information they need to provide such approval prior to closing.
Get signature blocks.
Have your investors provide you with their information for the transaction documents, including full legal name and address of their principal residence or place of business. Institutional investors will usually provide you with their signature block including address. For individual investors, you will need to know if they are investing in their own name or through a trust, IRA, or other entity. If investing through an entity, have the investor provide the name of the entity, state of incorporation or organization, and the name and title of the person signing on behalf of the entity.
If the initial closing is being conducted via an electronic signature platform, such as DocuSign or HelloSign, make sure your investors have provided you with the primary email address for the person executing the documents.
Follow up, follow up, follow up.
Make sure your investors are aware of the closing date and will be prepared to fund on that date. I recommend several, periodic reminders.
Some investors may want to provide signature pages and even fund their investment amount in advance of the proposed closing date. That's fine. However, make sure the investor understands that their signature page and funds will be held by the company in escrow until the initial closing, at which point both signature page and funds will be automatically released at that time without further action by either party when all of the other signature pages are received. Make sure this is communicated in writing, even if it is just an email.
Preview transaction documents.
Provide your investors with copies of the financing documents well in advance of the initial closing date. Give them an opportunity to provide comments or ask questions. Likewise, provide your investors with access to your data room containing material information about the company, including pro forma cap table and financials. (For more information about your due diligence obligations and data room set up, see our previous advisory on understanding your disclosure obligations to your investors.) If there are any changes to the financing documents prior to the closing, make sure you are communicating those changes to your investors.
Be prepared the day of the initial closing.
Ask your investors if they have any special closing conditions or instructions for you prior to closing. For example, some investors might require a management rights letter or other side letter for special information or participation rights.
Finally, provide your investors with wire instructions and be prepared to email, text, and call investors to sign their documents and wire their funds the day of the initial closing.
Prepare and send a closing book.
Once you have received all signature pages, assemble those pages and the documents into fully signed PDFs of the transaction documents, together with any other ancillary documents and certificates related to the transaction. Circulate a copy of this closing book to each investor and, of course, keep a company for your records. If you have subsequent closings after the initial closing, update the closing book after each closing and circulate the revised closing book to each investor.
Communicate with counsel.
Finally, throughout the entire process, communicate with your counsel regarding the status of all the above. Some founders are more comfortable handling many aspects of the closing process themselves, while others prefer that counsel control much of the process. Whatever your comfort level or preference, make sure your counsel is aware of the status of the closing and in particular the closing date – so that counsel can timely file state and federal securities notices.
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