What Happens After a Successful Pitch: Closing The Funding Round

What are the steps to closing the funding round? What happens after a successful pitch? Building a compelling pitch deck and delivering it effectively to convince investors is a tough, long road. But once you get that elusive “yes,” that’s only the first step.

It’s now time to gather the paperwork and documentation and prepare to receive the money in the bank. So, what preparations do you need to make? The expert fundraising consultant assisting you through the process will advise you accordingly.

Having a professional on board also helps you avoid unnecessary legal fees and streamline the entire process. They will explain each step in detail, including the reasons you need to follow the procedure.

Why Follow an Efficient Game Plan for Closing the Funding Round

Aside from the obvious—getting money into the bank quickly—following a clear game plan for closing the round is crucial. You’ll reduce the time it takes investors to finally transfer funds from the moment they verbally commit to backing your company.

Navigating Follow-up Meetings

Having delivered a successful pitch, you’ll follow up with investors within 24 hours. In addition to thanking them for their time, you’ll send over the additional information they requested. Your email should highlight and summarize the key discussion points and what both parties agreed to.

Depending on the pitch’s success, the investors may send you a confirmatory email. If they don’t respond right away, the email can serve as a reminder of how the introductory meeting went. Keep in mind that investors meet multiple founders and listen to several pitches before making a decision.

During a given quarter, they may invest in just one or two companies. Their final decisions depend on the capital they have available or intend to invest. Chances are, they’ll circle back to your proposal in the next quarter if it looks like an attractive investment opportunity.

Investors may need anywhere from two to five follow-up meetings, depending on the complexity of the deal. You can also expect more follow-ups if they are genuinely interested in financing the company.

During the second meeting, expect to provide additional data and in-depth information about the business model. If investors like what they see, they’ll request references and start preliminary due diligence.

The third and fourth meetings typically involve delivering the diligence paperwork. You’ll receive the term sheet at the fifth meeting and can negotiate the terms and conditions. Once this step is complete, the actual detailed due diligence can begin before finally closing the funding round.

Navigating the Due Diligence

The final due diligence can take between two weeks and six months. Several factors can influence this time, including the company’s growth stage and the complexity of its operations.

Larger companies with intricate financial structures will undoubtedly need in-depth analysis. However, startups that are not yet generating revenue and are relying on projections and comparable valuations also need deeper analysis. Then again, the funding amount will determine how long it takes.

Don’t overlook market conditions and the need for regulatory, taxation, and legal reviews before investors finalize the deal. You’ll also factor in the discussions and negotiations before you accept the term sheet. Preparing and processing the final paperwork before signatures is again time-consuming.

Preparing for Closing the Funding Round

With the guidance of your fundraising consultant, legal expert, and accountant, you’ll compile all the paperwork investors might need. Organize the documents by negotiation stage, for instance, during the initial due diligence and business plan. And, later, when closing the funding round.

Being ready with the documents and data that investors may request can cut short the back-and-forth and quicken the process. You’ll prepare the virtual data room in advance and populate it with the paperwork. You can always quickly add more documents later as needed.

Don’t forget to organize customized data rooms for individual investors based on the specific discussions and negotiations you had. You’ll also update the rooms according to the additional data they requested. This strategy will help you monitor and maintain records of the deal’s progress.

Next, you’ll prepare a list of documents that you’ll need from the investors to conduct reverse due diligence. For instance:

• Verification documents that the investors are accredited
• Communication addresses: email or physical
• Bad actor verification as mandated by Rule 506 of Regulation D of the
  Securities and Exchange Commission (SEC). You’ll need this verification depending on the investor and the amount of capital they’re willing to provide. Section 5 of the Securities Act requires entrepreneurs to ensure that they don’t accept funding from bad actors. If that happens, they must undo the deal and return the capital. You’re looking for entities with a criminal record, a court injunction, a restraining order, and/or a false representation.
• Investors’ Social Security or tax ID numbers. This information is necessary, particularly if your company is an LLC.

Negotiating the Term Sheet

Negotiating the term sheet and being transparent about expectations in advance helps in closing the funding round successfully later. In addition to answering questions, you’ll also ask for information.

Your objective here is to assess the investor’s financing horizons and return estimates. Remember that you’re also looking for the additional benefits you can count on beyond capital. For instance, industry-specific expertise, networking and partnership opportunities, and access to top talent.

You’re also looking for mentoring and guidance with navigating market economic cycles and other hurdles. Don’t hesitate to be upfront about your concerns. Investors appreciate questions because they indicate you’re anticipating a long-term partnership.

On their part, investors are also interested in eliminating the possibility of misaligned objectives at the outset. They are also looking to collaborate with founders who are open to tapping into the skills and expertise they can bring to the table. Everyone, including the company, stands to gain.

When negotiating the term sheet, learn to read between the lines to understand and address investor concerns. For instance, if they stress board seats and voting rights, that could indicate their lack of confidence in your leadership. You’ll respond accordingly to allay these concerns.

On the other hand, these clauses also indicate their interest in acting as strategic advisors to achieve the company’s mission. Accordingly, you’ll ask questions to gauge the extent of their intended long-term involvement in its operations.

Go over each clause carefully to identify any unfair or toxic provisions that could lead to hostile takeovers. Also, be watchful of ownership dilution and the loss of controlling stakes, which can result in conflicts. It is preferable to talk about your concerns and resolve them at this point.

Once you reach a consensus and officially agree on terms, in writing or verbally, you’ll stand by the commitment.

Planning the Closing

At the time of closing the funding round, founders often face a dilemma. They can wait to receive the funds until enough investors have committed to financing the round. And, have them wire the funds all at once. Or, accept the funds as and when each investor commits.

Lawyers and lead investors may suggest this strategy as it is clean and easier for them to organize. But, it need not be beneficial for the company. Opting for a “single closing” means that the investors, including the lead and follow-ons, wait until a specific date.

They sign the agreement and wire the funds together. However, this approach carries several risks, like losing momentum and slow-responding investors delaying the final closing. You should always be prepared for the possibility that investors will back out at the last minute.

This risk can create significant hurdles to successfully closing the funding round. It is more advisable to close each financing deal and receive wire transfers as you go along.

Not only will you maintain momentum, but you’ll demonstrate a proactive approach to the program. Most importantly, getting money in the bank instantly builds runway and de-risks the funding round. Another advantage is that you can adjust the round size based on investor response.

But there can be a flip side to this approach. Many investors hesitate to commit their funds until they are certain the company can raise adequate funding. They will want assurance that it will secure the necessary capital to fuel aggressive growth.

Are you looking for additional information about what happens after you raise money? Check out this video in which I have explained the next steps in detail.

Legal Documents Needed for Closing the Funding Round

Even as investors conduct their due diligence, you’ll continue preparing for the deal’s closing. Along with the reverse due diligence on investors, have your legal team compile these documents:

• Investor Suitability Questionnaire: You’ll provide this document to the Securities and Exchange Commission (SEC) to prove that you’ve verified the investors’ accreditation. Your legal advisor will put together this questionnaire and ready it for filing. This document is mandatory when companies file for a private placement exemption with the SEC.
• Amended & Restated Certificate of Incorporation: This document is crucial if you’re offering preferred shares to the investors as part of the funding deal. It outlines the restructuring of the certificate of incorporation. Preferred shares trigger changes in the company’s control and economic rights. This is why you’ll need to get a majority shareholder approval to confirm the certificate.
• Investors’ Rights Agreement (IRA): This agreement outlines the collaboration between the company and the investors. You’ll include details such as registration rights, information rights, contractual rights, and other important info. Typically, the investor drafts this contract, which specifies the specific closing conditions they require.
• Preferred Stock Investment Agreement: This document formalizes the relationship between the company and the investors. Once both parties sign the agreement, it becomes legally binding. It defines details such as closing conditions, representations, indemnification, the deal price, and other relevant information. This agreement is also called a Stock Purchase Agreement.
• Written Consents: If the financing round involves a significant amount of capital, you’ll need to get written consents from the board members. These consent documents explicitly state that the board and shareholders approve of the deal.

Streamline the Investor Journey

As you’re getting ready for closing the funding round, work with your lawyer to compile all the data you’ll need from the investors. Create a packet with the documents you’ll send over once the deal is finalized.

• All the documents investors need to sign to close the funding round, including the term sheet for reference.
• Instructions for investors on completing the documents, returning them to you, and wiring the funds.
• Detailed instructions and information for wiring the funds. If you prefer to receive checks, include the specific instructions.
• A questionnaire to gather all the additional information you’ll need from investors as the deal progresses.
• The complete set of pages that investors must sign. Ensure you’ve compiled all the finalized investment documents before sending them. Typically, investors sign and return only the signature documents. If you prefer to use digital signing tools like DocuSign or others, you’ll mark the signature fields within each document. In that case, you need not send the signature packet separately. Some investors may prefer hard copies over soft copies.

 
Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Additional Pointers to Organize the Closing Efficiently

To ensure closing the funding round successfully and getting money in the bank, keep these pointers in mind.

• If investors have expressed interest, get verbal commitments from them before sending in documents. Ensure their buy-ins, the amount they intend to invest, and the terms and conditions they expect.
• Send in documents to be signed as soon as they commit to seal the deal. If your investor documents are not ready, you’ll send a term sheet.
• If you haven’t achieved your minimum close requirement, you’ll send the investor documents with requests to sign and return.
  However, inform the investors that you’ll send the wire instructions as soon as you have adequate investor commitments for a minimum close.
• Once you hit the minimum close requirement, send over the documents for signing along with the wiring instructions.
• At this point, you’ll send executed documents. Countersigned documents can be signed once you receive signed documents from the investors or after the wire transfer is completed. Remember to alert the bank for transfers so they can inform you when the funds are received.
• Send paper documents only if investors ask for them. If not, digital documents work well.
• All documents should be in PDF format.

 
Preparing for closing the funding round in advance ensures it proceeds smoothly. You’ll get money in the bank with minimal delay, while demonstrating efficiency and top-notch leadership skills.

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