Lesson 9: Closing the Deal and Finalizing the Round
Why Closing Matters
Securing a term sheet is a significant milestone, but it is not the final step. Many deals fall apart in the closing phase due to legal, financial, or operational issues. The way you handle the closing process determines whether you finalize the round smoothly or face unexpected delays and renegotiations.
A well-managed closing process ensures that you secure the funds efficiently while protecting your long-term interests.
The Key Phases of Closing a Fundraising Round
1. Signing the Term Sheet
- Once a term sheet is agreed upon, it is not legally binding, except for certain provisions (e.g., no-shop clause, confidentiality).
- Ensure all key terms are aligned before signing, as it sets the foundation for final investment agreements.
2. Due Diligence
- Investors conduct detailed checks on financials, legal documents, and operations.
- Be prepared to share:
- Financial statements, revenue projections, and expenses.
- Customer contracts, vendor agreements, and intellectual property filings.
- Legal structure, corporate governance, and compliance records.
- Key team members' employment and vesting agreements.
- Organizing a data room in advance speeds up the process and builds investor confidence.
3. Finalizing Legal Documents
- Post due diligence, investors draft and negotiate the final legal agreements, including:
- Stock Purchase Agreement (SPA): Outlines investment terms and conditions.
- Amended Articles of Incorporation: Reflects changes in ownership and investor rights.
- Investor Rights Agreement: Defines voting rights, board seats, and liquidation preferences.
- Founder Vesting Agreements: Ensures key team members remain committed to the company.
- Engage a seasoned startup lawyer to review and negotiate terms on your behalf.
4. Handling Last-Minute Negotiations
- Investors may attempt to adjust terms before finalizing.
- Be firm but flexible—evaluate if the changes materially impact your long-term success.
- If necessary, defer secondary issues for future rounds to prevent unnecessary delays.
5. Fund Transfer and Closing
- After all documents are signed, funds are wired to your company's bank account.
- This process may take a few days depending on investor requirements and banking protocols.
- Confirm receipt of funds and update your cap table accurately.
Managing Investor Relationships Post-Close
1. Updating Your Team
- Inform employees about the successful raise and how it impacts the company's growth.
- Clearly communicate new goals and how the funding will be allocated.
2. Regular Investor Communication
- Establish a monthly or quarterly update schedule for investors.
- Share progress on key metrics, challenges, and strategic milestones.
- Engaged investors can provide guidance, connections, and follow-on funding.
3. Implementing Agreed Terms
- If new board members or advisors were part of the deal, integrate them into governance.
- Ensure compliance with reporting obligations outlined in investment agreements.
- Adjust hiring, marketing, and product strategies based on the new funding.
Common Mistakes to Avoid
- Not preparing for due diligence. Last-minute scrambling can delay or even derail the process.
- Overlooking legal terms. Failing to scrutinize liquidation preferences or voting rights can create long-term challenges.
- Dragging out the process. Investors may lose interest if closing takes too long.
- Failing to communicate with employees. Keeping the team informed maintains morale and focus.
Final Steps: Wrapping Up the Round
- Ensure all documents are signed and securely stored.
- Update your cap table to reflect the new ownership structure.
- Announce the round publicly (if appropriate) and use media coverage to attract customers and talent.
- Execute your post-funding growth strategy with discipline and focus.
Closing a fundraising round is a major achievement, but it is only the beginning. How you manage investor relationships and execute your growth plan will determine the long-term success of your company.