Written by Part 1 of 4
Welcome to our four-part series titled “You Just Raised 100 Million, Now What?”, here we’ll guide you through the processes and considerations as we proceed officially to close the Series C round and grow the business. Before we finalize the paperwork and close the round, there are crucial steps we must take to ensure everything is in order. The pitchbook has some great details on the term sheet details and terms you should be aware of.
Closing the Round
- Investor Due Diligence: Prior to the actual closing, investors will conduct in-depth due diligence on our company. They will thoroughly review our financial records, legal documents, intellectual property, customer contracts, and other critical aspects of our business. This phase is also an opportunity to evaluate the attainment of AEs and ensure we can fulfil the near-term deals promised. We typically work closely with the head of sales and CEO to ensure we’re well-prepared for investors’ scrutiny.
- Finalizing Terms: While the term sheet serves as a guide during negotiations, the final agreement will be documented in legal contracts. Work closely with your legal counsel and the investor’s legal team to iron out the details, including share price, equity issuance, protective provisions, and board representation, where applicable. (read the fine print on any preferences)
- Subscription Agreement: This legal contract with the investors will outline the final terms of the investment, specifying the number and type of shares they will purchase, the price per share, and any conditions or warranties. Make sure that prior to this scrutiny your cap table is clean, without any weird or unusual terms or side deals. I’ve seen investors threaten to bail when something is out of whack.
- Shareholder Approval: Depending on your legal structure and jurisdiction (usually a Delaware C Corp.), obtaining shareholder approval for the equity issuance may be necessary. No one should be surprised you are raising money so convene a shareholder meeting or seek written consent from existing large shareholders. Legal will assist with the necessary preparations.
- Regulatory Filings: File specific regulatory documents related to the equity issuance or investment with relevant authorities, such as securities regulators or other government agencies.
- Escrow and Fund Transfer: To protect both parties during the closing process, the investor funds will be held in an escrow account until all closing conditions are met. Once fulfilled, the funds will be released to our company, and the shares will be issued to the investors. There’s nothing like logging in to the bank account in the money and seeing that big amount of money in our bank account.
Post-Close Obligations
- Shareholder Reporting: After the round is closed, there will be an ongoing obligation to keep investors informed about your company’s performance and progress. Regular updates, such as financial reporting, strategic plans, and major developments, will be shared to maintain transparency and trust with our investors. Depending on the investor’s information rights, we’ll provide the necessary granular details or summary and often you will upload metrics into a dashboard for major VCs quarterly.
- Board Meetings and Participation: The lead VC from the round will typically get a board seat, and it’s important to provide the board members with the necessary information and updates (and no surprises!). In some cases, VC firms might also have rights to a Board Observer. Build on the relationship with the board and remember every board member is a little nuanced so take the time to foster that connection.
- Use of Funds: Try to stick to the use of funds plan as outlined in the series C investor deck, recognizing some things will change. Transparent communication about how we use the investment will build investor confidence and trust so dont go crazy by surprising people with large capex projects or international expansion if that was not in the plan. Everyone understands that things may change from the fundraising model to the operational model, so avoid significant deviations or surprises.
- Compliance and Reporting: As a company that has received external investments, adhere to additional compliance and reporting requirements, including accounting standards, tax reporting, and any specific obligations in the investment agreement.
- Future Rounds and Exits: Investors will be keen to know your company’s future fundraising plans (debt too) and potential exit strategies. Keep them informed about any plans for subsequent funding rounds or potential mergers, acquisitions, or IPO planning. It’s a given that as a growing company, we’ll continue raising money and increasing our valuation, so transparency is key.
- Investor Relations: Maintaining strong investor relations is essential to the people who give you money. Promptly responding to inquiries and providing timely updates on our performance will foster positive relationships and potentially attract follow-on investments. We’ll ensure we provide a flash report when each quarter closes, prep for board meetings, and summarize key metrics for the broader investor group.
Don’t Forget the Employees!
Options Top Off in Equity Financing Rounds: Pre-Money vs. Post-Money
Consider the timing of adjusting the employee stock option pool in response to the issuance of new equity in an equity financing round. Both pre-money and post-money approaches have implications for dilution and ownership distribution.
- Pre-Money Options Top Off: By increasing the option pool before new investors come in, the dilution is shared between them and existing shareholders. However, this might result in a higher percentage of the company being allocated to the option pool, potentially reducing the equity available for new investors.
- Post-Money Options Top-Off: In this approach, the dilution resulting from the options top-off is borne solely by the existing shareholders, ensuring new investors’ ownership percentage is not further diluted.
Remember that the success of your company depends on how we utilize these funds wisely and strategically. We are stewards of capital so the better returns we get the more money we will receive in the future. Our next chapter will dive deeper into the operational budget, ensuring we make prudent decisions for sustained growth, efficiency and success.
In Part 2, we dive into “How to Get Your Operating Budget Approved.”