Raising money is never fun. When the time draws near to a date at which you want to officially stop fund raising and collect the money, things tend to get pretty hectic.
So what happens exactly? And who is involved? What are things you should watch out for?
Let’s say you created a term sheet X weeks or months ago. You’ve met with a whole bunch of investors and some of them say they will invest (usually we say “we’ve soft circled them”). The term sheet has been negotiated and potentially changed, and you circulate that back to each investor and finally everyone says they’re on board and they’re ok with the final term sheet.
And then, time draws near and you realize it’s time to get serious and actually get the money. What happens?
1. In the financings I’ve done, the law firm project manages this process. They help circulate the documents, gather signatures, send reminders, etc.
2. The law firm has an escrow account where investors wire their money. As one entrepreneur I met put it, “The reason why you wire to an escrow account is to prevent us from absconding with your money (if wired into our own bank account directly) to the Cayman Islands before all the official paperwork was finished .”
3. The law firm takes the term sheet and expands that into official paperwork that spells out the terms in detail. The investors sign these documents and they make everything official. This paperwork is passed back to investors for review and signature.
4. Due diligence materials from the company are sent to each investor upon request (and I HIGHLY recommend that) to make sure everything is in order. Every company document is sent, every record, every contract – just about everything. Thankfully for early stage startups, there isn’t that much paperwork to review. But imagine if you were to do due diligence on buying a company like Yahoo! or IBM. The due diligence alone would be staggering as you reviewed every contract, every patent, every legal dealing, every lawsuit – everything that could introduce risk into the investment. You don’t want to miss something that could turn what appears to be a great investment into zilch.
5. The CEO devotes his/her entire life to the closing during the last 2-3 weeks before close of the financing. He calls every investor and double checks to make sure they are still on board. He fields any last minute questions. He assures investors that the close will happen and makes sure everyone knows to sign papers, wire money on time, etc.
6. Investors need to prepare the cash for wiring. This could take some time to prepare if the investor needs to sell stocks, or get out of other investments. They may need to give their money manager lead time to make sure cash is available. Even the wiring process takes time. I fax in requests the day before with wiring instructions just to make sure that they get in on time. If the money is being wired internationally, you have to be wary of the fact that it could take additional time, or the wiring may not even be accessible to that account from theirs. More warning is always better than less.
7. Signatures also take time to collect. The law firm project manages the collection of the signatures and makes sure that everybody has signed the right papers on the right lines.
8. After the money is collected and the paperwork signed, then the law firm gets copies of signed paperwork back to the investors and, if it is an equity deal, prepares stock certificates and sends those back to investors as well. Other paperwork that goes back to investors can include receipts for the money wired; one law firm prepared a huge notebook for me which had all the involved paperwork in it. Very nice!
9. Be prepared for high stress situations as the time draws near, the lack of sleep, distractions up the wazoo. You must remain focused and determined through the whole process.
So there are never problems, right? HA. What COULD happen:
1. At the last moment, one or more investors back out and you’re left with less cash than you expected, perhaps substantially less.
2. Other investors backing out could cause even more investors to back out. It might be interpreted as a vote of no-confidence for the investors.
3. Some strange investors could keep saying they’ll send you money, but it never shows up.
4. Unfortunately, I have also seen the law firm flake out which is REALLY BAD. All the more reason for the CEO to keep tabs on EVERYTHING and make sure it’s all moving along.
All sorts of things can happen which can spoil your day. As CEO of a startup and going through this process, you should make sure your full attention is on this and be ready to adapt to changing, chaotic conditions – but rejoice when you get every investor that you say you got and see that money arrive in your bank account.