Tracing your steps in the fund-raising process so far – a few venture capital investors reviewed your Start up’s business plans, subsequent an initial analysis and evaluation. You met these investors to make a formal presentation and negotiations ensued. Everything went well and you signed a letter of intent (term sheet) with them. While you appreciate this accomplishment, know the deal is yet to close. Here are some advices on how to go about to close a deal right.
It’s dangerous times – Deal risks
A letter of intent or term sheet shows the investor intends to continue with you on the negotiations. So, there is the risk of a deal falling apart due to an interplay of variables such as cynicism basis the economic deterioration or an increase of market or industry systemic risk.
At the helm of these causes is Time as a factor. As time progresses, the scope of these occurrences increases. Thus, the decrease in the probability of your business’ relevance in the investor’s portfolio.
A deal falling apart is detrimental because you need to start again. Probably, now the investors are less likely to fund your business. This is either because, they have moved on or, are now suspicious of being a “back-up” or, aware of a broken term sheet.
Therefore, agility is your advantage.
Closing date is crucial but keep it flexible
Since a delay in closing can be expensive, have a closing date clause in your Start up’s financing agreement. The clause should have a provision for “mutual agreement” because the date could be a moving target especially when you’re undersubscribed. It’s for optics – other investors are investing in your Startup at the same time. It is common knowledge that closing many investors on the same date is akin to herding cats.
Simple and flexible investment options
Negotiations drag on over complex rights arrangement and over-valuations. This adds to the cost legal and financial counsel, deal risks, and reduced leverage with your lead investor and other potential lead investors. So, keep it simple and optimum. Flexibility facilitates negotiations. So, offer investment options – different amounts or thresholds, time horizons, repayment schedules, convertible debt, preferred stock. Since, every investor’s motivation varies, being unyielding may not be fruitful.
Out of sight, out of mind
You may have to meet investors several times to convince them about your growth prospects. Comprehend and address their doubts or concerns about financing your Start up. In the final meeting, ask existing partners and board members to join, as your references. Don’t pass on the reins to close the round, instead, continue to be involved. Communicate the deadlines and responsibilities to the investors and key stakeholders. Observe and follow-up to ensure everything and everyone is on course. Organise an All Hands Meeting with the investors and legal representative, to resume stalled documents.
And that’s a wrap!
Closing could take anywhere from 1—7 days from the document completion. So, as you near completion, set a date with the investors to sign all papers and transfer the funds to your or the Start up’s bank account. Continue dialogue with the investors to be aware of their preparedness.
When the money is in the bank, applaud, cheer, and celebrate! You’ve closed it now.