Previous articles have talked about party rounds and keeping momentum in your fundraising. This one will focus specifically on the close, which ideally is a foregone conclusion but sometimes becomes the period of highest stress in a fundraise.
1) The Legal Diligence — Have A Budget
Legal diligence is not just a way for lawyers to make money, it’s fundamentally necessary to ensure the company is in good standing in terms of structure and contracts, avoiding many future problems.The norm is for the lead investor to do a legal diligence paid by the company and all other investors take cue from it. This brings up two main points.
One, cost — you as the entrepreneur should make sure there is a budget around the legal expenses. The earlier the round the lower the will be i.e., a seed legal diligence is cheaper than a series A. In Silicon Valley today the budget tends to range from $15-35K, but obviously there are exceptions on both the lower and higher end. SAFE notes have become very popular recently because they are essentially templates — so the investor skips diligencing the term sheet but they will still need to do the legal review of all other company matters.
Two, time — a legal diligence is typically 2-4 weeks. Note if the other investors want to do further diligence they can do it on their dime. Corporates will typically do so, in which case the entrepreneur should be aware upfront since it will usually add more time to the close.
2) Preferential Treatment — Spell It Upfront
If any investor is getting preferential treatment, say having super prorata rights or warrants, it is often spelled in the term sheet. The other common way is to do it through a side letter, so that it’s part of the close and all current and future investors can review. If the preferential treatment is material, entrepreneurs should ideally message the key investors upfront rather than having them discover during a legal diligence. Startups are no different than many other businesses in that good, proactive communication builds and reinforces trust.
3) Wiring — Have An Early Process
Most entrepreneurs will send wiring instructions as the very last step of a close, with a deadline of at most a week. Nothing inherently wrong with such a process but it’s even better if you message about wiring earlier, perhaps right when legal diligence kicks off. That way you can also uncover if any investor will have special circumstances around the wiring. Remember when VCs say they have $100M they do not have it all sitting in the bank, at any given time they usually have a fraction of it available, with the whole fund being available over time. Aside from the cadence of capital calls, sometimes the VC may be investing in you through a SPV, so clarifying the exact vehicle and timing they will be investing through is a good idea. Asking for the VC’s signature block is usually the quickest and easiest way to learn that.
4) A Second Close — Avoid It
One of the most powerful forcing functions for a startup’s fundraise is the impending deadline of a single close. If you are having multiple closes then some VCs might simply defer their investment to the final close. Which is why you should avoid having a second close unless absolutely necessary. Startups that do so are usually bringing along a very specific investor who has asked for more time. Another circumstance is if some investors are selling their ownership and others buying it i.e., the second close is specifically meant for a secondary transaction.
5) PR — Tell Investors About The Plan Right When They Commit
Don’t wait till the close to have a plan around PR, ideally you want to tell investors right when they commit about what you are considering. That way you have more agency over messaging, from VCs disclosing informally (e.g., talking to other VCs) or more formally (e.g., putting the logo on the website). Same goes obviously if you are planning no PR at all. Some VCs are very active in social media, others write articles themselves, others have contacts in media — all of these will be easier to leverage if you bring up the PR plan early.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.