The moment of truth has arrived: it is time to close the round. The deal lead and founders worked hard together to line up investors, negotiate terms, work through deal documents and disclosure schedules, and track down every last detail of cap tables. As usual it took longer than expected, everyone is exhausted and the company needs the money urgently to make long-postponed investments in growth.
So how is it possible, after all that time and all that effort, that the deal leads and company counsel could risk blowing the closing by making an incredibly basic common sense mistake? It is all too common mistake across the early stage investing landscape. What is this mistake? The closing package from hell – the biggest “unforced error” in all of early stage investing.
Every investor has experienced it. A giant mess of documents arrives via email late on a Friday night from some person you never heard of. Some documents are in PDF, some Excel, the rest in MS Word. They are all dumped into the bottom of an unclear email demanding immediate attention and response. The documents are inscrutably named, with long strings of digits from internal file system numbers.
When investors start to wade in, nowhere is it made clear what documents they are supposed to sign and what documents are for information only. Nowhere does it indicate where in the document they are supposed to sign. Nor is it ever made clear that several documents need to be signed in two places and one in three. And of course some documents are only for existing investors whereas others need to be signed by everyone.
The predictable result of this mess? Investors are confused, frustrated and annoyed. But far more importantly, necessary signatures are not returned in time for the closing. Which means that the closing is delayed and extra time and money is wasted chasing all the missing paperwork. All due to a rookie mistake that is incredibly easy to avoid.Here’s how.
If you are a deal lead, make absolutely sure the lawyers in charge of the closing (typically company counsel, but it might be the company CEO or even investors’ counsel) send each investor an email containing the following four essential elements:
(1) Omnibus Signature Page Document
This one single omnibus signature page document should be a separate document which contains all the required signatures from all the other documents, and nothing else. Critically, this omnibus signature page must feature a very simple, obvious, and suggestive file name like "Required Signatures Document” or “Sign Here.”
(2) Instruction Sheet
This is a one page instruction sheet, also sporting an obvious filename, which contains:
· instructions for returning documents
· deadlines by which things must be returned
· physical mailing address for those sending checks
· wire transfer instructions for those sending wires
· telephone and email address of someone investors can contact with questions.
(3) Full Set of Deal Documents
These are for people’s records. The best and easiest way to do it is to assemble them all into one PDF “binder” with a table of contents (most PDF editors make this assembly fairly easy) and just email it out to investors. An email with a bundle of individual documents is an acceptable second choice but, please at least have the decency to use short descriptive file names. Nothing says “I don’t care” quite like a voting agreement named “Acme SrsA-1_v5 (4091-0941238947-91348120-398409180-3947182734-98712340-98)”.
If you feel you must send the documents by physical mail, please send an inexpensive memory stick instead of a CD since many computers no longer have CD/DVD drives. And of course, the worst possible choice is to mail physical hard copies – crazy as that sounds, it is just more work for everyone since most investors will have to scan them to upload them to their Seraf account or computer.
(4) Next Steps Memo
The final essential item is a short, clear memo or sketch of what to expect in terms of next steps. This next steps memo can be in the body of the transmittal email rather than in the instruction sheet, but it needs to include some clear, explicit statements about what will happen next:
· when you expect to close
· how you will announce the closing to investors
· when investors will receive their counter-signed deal
· when they should expect to get their stock certificates
· any other pertinent, near term details.
As should be clear from reading the list of items above, this is all common sense advice. Nothing in this list is difficult. Yet it is omitted or forgotten with remarkable frequency. This is attributable as much to inexperience and/or the rush to get over the already-delayed finish line, than to any real intent. However, as Virgil said in Book 3 of the Aeneid, “moniti meliora sequamur" which translates roughly to “now that we have been instructed, let us pursue the higher path.”
Cleaning up your closing transmittal game is not only going to save a ton of aggravation for your investors, it will allow you to actually close on time. Plus, as a bonus for you, consider that the more questions you anticipate and answer at this stage, the fewer questions you will get in the immediate aftermath.