Maret Delf
This article likely contains much more detail than the average founder needs (or wants!) to know about what’s going on behind the scenes in between signing a term sheet and closing a round. But, you can use this as a comprehensive reference guide when you’re navigating the process. Warning: acronyms abound.
There’s typically about 4 weeks between signing a term sheet and the initial closing/funding of the round. This timeline can be extended or compressed by a number of factors (e.g. how complex the terms are, or how much diligence the investors do). This may sound like a long time, but as you’ll see below, a lot goes into the financing process that your lawyers will take care of behind the scenes. Although term sheets usually cover the majority of the crucial terms, there are always other items to negotiate once the more comprehensive documents are being drafted. If you absolutely need the money by a certain date (e.g. to make payroll), tell everyone at the beginning of the process.
After you’ve signed a term sheet, several workstreams will happen simultaneously:
(1) Document Drafting: The lawyers (typically, company counsel) will draft the 5 main financing documents, which are usually based on standard NVCA forms. They’ll also draft the pro forma capitalization model, and all of the ancillary documents. A brief description of each of these documents is in the “Documents” section below. Once your lawyers finalize initial drafts of these items, they’ll send them to your investor’s counsel so that they can review and provide comments. There are usually a few “turns” of these documents back and forth between company and investor counsel as they negotiate (with your and your investors’ input).
(2) Disclosure Schedule: Your counsel will explain the Disclosure Schedule process to you, and get you started on an initial draft. We’ve included more detail on this process below; it’ll likely be the document that requires the most input and time from you and your team.
(3) Data Room & Diligence: You’ll work with your counsel to populate a data room with all of the documents that investors will expect to review in their legal diligence process. You’ll ideally open up the data room to investor counsel ASAP so they can begin reviewing. If there’s anything non-standard (e.g. ongoing litigation), it’ll speed things up to give investor counsel a heads-up about it right after you sign the term sheet. Investor counsel will review everything in the data room, ask questions, send follow-up requests, and will likely ask for any issues that they uncover to be fixed before closing. Especially if your company has been around for a while, diligence can be a large, time-consuming undertaking. So, if you want a speedy closing, it’s best to get the data room fully populated and opened up to investor counsel as soon as you can.
(4) Closing Coordination: Once the documents and diligence are finalized, Company counsel will handle the closing mechanics like collecting signatures, filing the new company Charter, and circulating the final signed docs to all investors and asking them to wire.
Term Sheet: Describes the major terms of the deal (but there will inevitably be more to negotiate once the process moves forward). The term sheet is typically just between the lead investor and the company; other smaller investors decide whether to participate in the round based on the terms that are already in the executed term sheet.
The 5 Main Documents:
Disclosure Schedule (aka Schedule of Exceptions or SOE): The Disclosure Schedule lists all exceptions to the broad representations that the company makes in the SPA. For example, if an SPA rep said “the company has never filed our taxes late” but the company had filed them late one year, you’d add a disclosure to the Disclosure Schedule saying something like “we got an extension and filed our taxes late in 2017” instead of revising the SPA rep itself.
Pro Forma Capitalization Model: The pro forma is an Excel model that calculates the price per share of the new Preferred Stock, models everyone’s post-round ownership, and does other things like calculate any increases to the option pool size.
Ancillary Documents: Company counsel will draft these less-important docs and investor counsel will review them, but they’re unlikely to be the cause of much negotiation:
Closing Mechanics Stuff:
Disclaimer: The content provided in the Amplify Legal Hub is intended for informational purposes only and should not be construed as legal advice. Always consult a qualified legal professional for advice tailored to your specific situation.