From Term Sheet to Closing: A Founder’s Guide to Ace Your Financing Round
- Honesty: Be honest, especially when it hurts.
- Respect: Be mindful of everyone’s time.
- Avoid double-work: Use English documents from the beginning and always circulate redlines along with updated versions.
- Keep it simple: If available, use industry templates (e.g. US: Templates from the National Venture Capital Association (NVCA) or the Simple Agreement for Future Equity (SAFE) from YCombinator); UK: Templates from the British Venture Capital Association (BVCA).
- Stay consistent: Try to keep document updates to a minimum.
- Keep it short: Longer agreements are not necessarily better agreements.
- Own the process: Keep everyone in the loop and stick to your timeline.
- Ask the experts: Retain a VC-experienced lawyer that has sufficient English language proficiency.
Let’s be honest. For most founders, fundraising is tough. Some compare it to dating, some are direct and call it outright brutal. Unless you are a VC-hyped hotshot, your fundraising will likely be challenging and even small mistakes can have a big impact.
This article won’t help you with calling up VCs, making slick, impressive pitch decks, or putting on a compelling presentation (for that, take a look here). With this guide, we want to help you avoid common mistakes with your financing round as you’re approaching the finish line. It’s also a friendly reminder that a signed term sheet is not the end of the investment process. Plenty can still go wrong on the last steps until you finally have that $$$ in the bank.
Be mindful, honest, and a little paranoid
Most term sheets issued by VCs are non-binding and make the investment subject to due diligence or even certain milestones. However, for most serious VCs, the following holds true: If a term sheet is issued, it is quite likely that the VC wants to follow-through with the investment––unless a last-minute red flag pops up that cannot be solved in an economically justifiable way. (For other reasons why a VC would pull out of term sheets, see here.)
This is because a VC usually has to go through several steps internally, including getting partners and investment committees on board, before a term sheet is even issued. Of course, in the current volatile market environment, there’s no fool-proof method to avoid losing a term sheet. Disappearing term sheets unfortunately seem to be the new normal. But you can at least avoid losing a term sheet because of mistakes you’ve made.
Pro tip: There is no need to “optimize” your (often not yet existent) product, figures or budgets. A VC knows that all commercial assumptions will likely change over time.
VC is a people business. They do not invest in annual statements or products. They invest in founders. For this to hold up, a VC needs to trust the founders. If you are dishonest, then you’re opening the door to some serious consequences, including losing term sheets. It is as simple as that.
While a VC might really want to close the deal and sit on your (board) table, never forget that your interests might not be fully aligned. Read through the agreements carefully, especially governance and commercial topics (e.g. board composition; board majorities; board voting; founder vesting; leaver events; liquidation-preference). Ask your lawyer if anything is unclear. Critical thinking never hurts.
English and standardized agreements are your friend
If you are planning on attracting international top tier VCs, English is all that matters. Even local VCs mostly prefer English documents because it is easier for the due diligence in follow-on rounds. It’s very likely that a VC will not accept agreements in any other language (or will ask you to have everything translated).
If you are incorporated in a non-English country, make your life easier and start with English documents. It will save you the hassle of translations or creating bilingual documents. That said, in some countries, certain documents (e.g. articles, register filings) need to be in the local language. In such cases, have your lawyer prepare English convenience translations.
When you are a founder in a sophisticated VC market, such as the US and UK, then you have the luxury of widely available, standardized (i.e. cheap) agreements (NVCA / SAFE in the US; BVCA / ASA in the UK). Use them and insist that your lawyer works with them. VC-specialized law firms have their own templates that are based on these model agreements. You, your lawyer, your investors, and your investors’ lawyers will save an enormous amount of time if these templates are used and only adapted to the extent necessary to implement your financing round.
If you are incorporated in another market, don’t worry. In every country, there are specialized VC lawyers that will help you out. Ask them to use comprehensive, but short agreements. No investor wants to read through hundreds of pages. A standard Seed/Series A round can have less than 120 pages (roughly 20-30 pages for investment agreement with reps and warranties; 30-50 pages for the shareholders’ agreement; and less than 40 pages for director contracts, IP transfer clauses and corporate approvals). Trust me.
As an exception to the above rule: There is no such thing as a standard template convertible loan agreement (CLA). In my experience, every law firm has its own and they differ significantly. However, as these agreements are usually quite short (20-25 pages max), this is not a crucial item.
Be realistic about the timeline
Tinkering with the details of the actual agreements requires not only your lawyer’s attention, but yours as well. The same is true for your VC. It’s good to drive the process (see below), but do not overstep it.
Here are some guidelines to follow based on the 300-plus deals our team has done in the last two years:
- A forward equity instrument (e.g. SAFE, ASA) can be closed within a few days to a week.
- A debt instrument (i.e. convertible loan note) is more complex than forward equity. Plan for 1-2 weeks.
- For an equity round (i.e. shares being issued), 3-5 weeks is realistic. We regularly see exceptions to this rule in both directions. Just recently, we closed an equity round in just three days, while simultaneously working on a round that lasted for more than five months. It’s not good if rounds take longer than two months because it shows lack of ability to execute.
- Every round of updated agreements creates work on both sides (and increases legal fees). Try to avoid numerous document iterations. If you need to run multiple work streams––with the (co-)lead investor(s) and existing shareholders––make sure your lawyer supports you in every work stream. Have them collect input from all relevant stakeholders before changes are implemented and updated versions are circulated.
- Experienced founders send out initial drafts. Give the lead investors 4-10 days for the initial review (they need to involve lawyers, read the agreements, and align with lawyers), have one round of negotiation and circulate updated drafts within 2-3 days after the meeting. This process can be repeated. Subsequent negotiation rounds are usually quicker. In general, a seed round should not have more than two rounds of negotiations. In later stage rounds, it gets more complex and negotiations tend to take longer.
- Always remember: Your VC has several companies to manage. They are also keen to get the long form phase over the finish line as quickly as possible and start working with you on the actual business. Help them by making it as easy as possible for them. It’s good to retain a tight grip on overall progress, but do not push too hard. If a review takes a bit longer than expected, accept it. Your VC wants to close as quickly as you do.
Own the process internally
See yourself as the middleman. You’re not only the founder who’s eager to develop and sell a great new product that will change the world. You’re also the go-to person for your investors. As such, you are the host of your financing party. Make sure that everyone knows the program, has a drink (a copy of the agreement) in their hand, and is entertained.
I have seen founders delaying signing multiple times or calling investors to stay up late just to sign a shareholder resolution. Don’t be that person. Instead, run a smooth process. Make sure everything is aligned and the investors have a positive experience dealing with you. Some things to consider:
Corporate approvals: As a founder, it is your responsibility to manage existing shareholders and investors. You can outsource most of this work stream to your lawyer. Your new investor expects this to be lined up well in advance before you get close to signing.
Keep everyone in the loop: This encompasses two things. First, be proactive with updates. Second, make sure that relevant parties talk to each other. You do not need to send daily updates on progress, but make sure to chime in with the major parties involved at least twice per week (especially if there are no calls scheduled).
Lock in economics: Lock in the economic dynamics of the round as early as possible. If the cap table is still moving close before signing, consider a second closing so that you are able to close the investors that are already on board.
Stick to your timeline: If things get tight in the end, delay signing for 1-2 days and get everything in order. Most likely, nobody will care. People do care, however, if their evenings and nights get entangled with some signing/closing due to poor process management. When scheduling calls or setting timelines for feedback, always assume that your stakeholders have evening plans and want to be at another signing party. In other words: Don’t take yourself too seriously. Aim to get everything done during business hours.
Be conscious of (public) holidays: If you have an international investor base, chances are that there is always somebody on holiday and/or a public holiday in at least one country. Communicate important dates (alignment calls, signing days) well in advance and make sure that everyone is available.
Separate commercials and legals: Discuss commercials with your investors and have legals discussed among lawyers. If an investor is represented by in-house legal counsel, they might also be involved in all commercial discussions. This is not a red flag per se. However, if you do not feel comfortable in such situations, ask to discuss commercials only or invite your lawyer to the call. No serious investor will have an issue with that. Of course, this does not mean that you should avoid discussing commercials with your lawyer. Ask them. A lot. About everything.
Document versions: Always have your lawyer work in track changes and prepare redlines against most recent versions. This saves time on both ends.
Co-investment: In a co-investment situation (if co-investors do not co-sign term sheets), try to get the investors to talk to each other as quickly as possible after you have sent out the initial drafts. They also need to align.
Calls: Keep them to a minimum (we usually try to have less than three legal calls per round). In a standard VC round with VC experienced lawyers, most items can be discussed asynchronously via email.
SIGNING / CLOSING
PoAs: If you are in a country where signing needs to take place in front of a notary, make sure to send out PoAs well in advance. This process may take up to 4 weeks if apostilles are required as well (about 1-2 weeks for ordinary notarization).
- Execution versions should be sent out 1-2 days prior to signing for final sign off by investors and their lawyers. This also allows for last minute changes and alignments.
- Have your lawyer circulate a full set of final agreements as a Word document in track changes mode and as a clean version. Most legal advisors want to be able to make their own redlines in addition to the ones being circulated.
- Ask well in advance for details on signatories. Especially for professional investors, it is very likely that the signatory is not the person you are talking to.
- Make sure to get all signatures at once, especially if you are not using electronic signatures. After signing, no one will be particularly happy with chasing additional signatures.
- Have your lawyer support you wherever possible.
- Use electronic signatures wherever possible.
Retain a VC-experienced lawyer
Just as you wouldn’t ask your ophthalmologist or GP to perform an open heart surgery, you shouldn’t ask your competition or family lawyer to run your VC-backed financing round. Even though lawyers in most countries have a very comprehensive know-how in a large variety of legal fields, they usually do not have industry specific knowledge, unless they work in a certain field on a regular basis.
If you want to work with a lawyer you already know and are not sure about their experience handling financing rounds, ask them about the five most recent deals they did. If they cannot give you any credentials, consider finding a specialized VC lawyer.
An inexperienced VC lawyer will initiate unnecessary discussions around terms that are standard in the VC world (but might not be in other areas such as M&A). Your lawyer has an important role in the financing round. Save yourself nerves, time, and money, and only work with specialized lawyers.
Read and routinely refer to this blog article explaining why good legal counsel is so important.
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