A fundraising for a startup is always good news and helps in the growth of the company. That said, the process accompanying any round of financing can be lengthy and complicated, especially when not well planned, structured, or organized.
An entrepreneur seeking to raise fund should firstly consider if she/he is prepared to lose a chunk of her/his equity in the company and subsequently be diluted as long as the company is moving forward. The prevailing thought is: a smaller slice of a bigger pie.
We previously discussed the transactions documents needed for the completion of a round of financing http://www.smelaw.com/introduction-seed-round/. Transaction documents, however, are not everything, and a large number of startups, especially the early stage ones, underestimates the efforts and time required to close a round of financing.
In this article we highlight the major points, we commonly see necessary to properly close a round of financing, and the different solutions to reach this goal.
The goal is closing not signing.
Founders in a fund-raising scenario are focusing on completing the paperwork as fast as they can in order to obtain the investment amount needed for the growth of their company. they commonly expect investors to pay as soon as the subscription agreement is signed. Unfortunately, the signature of such agreement or the whole pack of the transaction documents does not mean it is time to receive the investment amount. The investment amount will be due when the company fulfill its conditions precedent and reach the closing as defined in the subscription agreement.
What is Needed to Close a Round of Financing?
In a typical round of financing, the investors usually set some conditions to be completed by the founders in order to release the investment amount. These conditions vary from a company to another, and they are based on the due diligence exercise conducted by the investors. They tend to address risks the investors see needing remedy.
Here are some of the conditions that we usually come across for early stage companies:
- Corporate restructuring for the company;
- Rescinding of certain agreements executed by the company; and
- Intellectual property protection measures to address intellectual property risks.
Our advice to the founders in relation to reaching a proper closing for the round of financing is to follow four (4) basics rules.
- Hire a competent VC lawyer to represent you and the Company;
- Always speakwith the lead investor; keep the lead investor up to date with the growth of the company and familiarizes it with the conditions precedents and their expected time impact set by the investors before finalizing the transaction documents;
- Start working to work on the conditions set out by the investors once they are identified without any delay, even before the signing of the transaction documents; and
- Set out a rational closing date, accommodating the negotiation period of the transaction documents and the timeline required for the fulfilment of the conditions precedent.
In addition to the above, we advise the founders to be prepared for the required paperwork related to the issuance of the shares for each investor and the procedures to amend the company’s articles of association, where necessary. These procedures usually involve many submissions to various authorities.
Running Out of Cash
In case the startup is rapidly growing and investment funds is immediately needed to keep the company working, the founders, directly applying rule number two (2) above and keeping the lead investor up to date with the growth of their startup a part of the investment funds to be advanced in the form of a Convertible note (such as a SAFE Note). This can allow all parties a reasonable time to complete the transaction without the risks that result from a rushed job.