A Ridiculous Story for You
Let’s say that you are a person. You are a person who wants a custom-made suit for a special board meeting. You go to the tailor and you work with him to pick out the material, and you talk about the vision for what it will look like and the goals you have for your new suit (you want to look fabulous in the boardroom!). You get your measurements taken and go home, assured that your suit will be ready in a week. You come back the next week, pay for your suit, and try it on one last time. It fits great and looks great but it’s not quite ready for your board meeting. The catch? It’s being held together by pins. It’s not sewn together with thread yet. Still, you happily pay for it, take it home, and hang it in your closet with the pins still sticking out. When the big event—the board meeting—comes, you go to the meeting looking like a voodoo-doll. You have pins sticking out left and right.
The board members look over their glasses at you and ask you what’s wrong, why isn’t your suit finished? “It is finished!” you tell them. This is what the tailor gave you, after all.
One of the board members calls their personal tailor, and this tailor arrives and sews your suit together. The new tailor writes up a bill before leaving, and the board member passes it to you to pay. This is the second time you’re paying for the same suit.
You are very happy about how things have gone.
Does this sound incredible? Yes, it does! But then so does this next story about a startup founder, and unfortunately it happens all of the time.
A Real-Life Story for You
Let’s say you meet with a lawyer named Taylor and you pay him to create a bridge note for you. First you discuss the vision for what it will look like and what goals you will achieve. Your lawyer Taylor drafts a term sheet, which the investor, Sally, agrees to. With her green light on terms, Taylor then drafts the full document. It then gets sent to Sally who agrees that the document looks great. Sally emails you her signature block, and wires you the $100,000 that the agreement stated that she would. You pop champagne and celebrate the bridge note. You are very happy.
A year later you are trying to get a venture capital firm to invest in your company, and they insist on a due diligence. After looking at your documents, they deliver the bad news. You have documents, like Sally’s bridge note, that are not complete. You tell them they must be mistaken, because, after all, that is the document your lawyer Taylor gave you.
The VC firm calls their own lawyer, Victor, to go through your documents. “Well, where’s Sally’s signature?” asks Victor. “Did she sign her bridge note? Where’s the date?” You can’t find it in your inbox, but you know you have the signature somewhere. After a few days of looking, you still can’t find it. This is holding up your financing—the venture capital firm won’t give you money until your documents are complete.
Victor, the VC lawyer, asks Sally to again sign the document the lawyer Taylor had created, and does similar cleanup on other documents. When he’s done he sends the venture capital firm a bill for his work cleaning up your incomplete documents—which they pass along to you to pay. This is the second time you’re paying for the same set of legal documents.
You are very happy about how things have gone.
Not Ideal, Yet Common
The main characters in both of these stories seem foolish. And yet while no one may think a pinned together suit is done, it happens very often that founders think incomplete documents are, in fact, complete.
Ideally, you would make sure the tailor finished your suit before you wear it in the board meeting. Why wouldn’t you treat your documents the same way? Why wouldn’t you work with your lawyer to make sure your documents are finished before taking the documents through a due diligence exercise? At the end of the day, you are the keeper of your company documents. It is up to you to make sure they are truly done.
What Makes a Document Done?
The signatures of all parties must be attached to the actual document they are supposed to be signing. Signatures should not be floating by themselves as a one page document that has a single signature and nothing else on it. It must be attached.
The blanks for dates are actually filled in—not just the year, not just the month, but the day too. Please, let’s avoid any “May __, 2018” dates.
All terms must be filled in. For instance, it is not enough for the discount percent in a bridge note to say “__%.” To be a done document, it had better say 10%.
Don’t Be That Guy
To be fair, not all companies are passive about getting their documents properly executed—many will do all kinds of things to get their documents signed. They’ll chase investors for months to get a bridge note investor signature. They’ll hound employees for a signature on an offer letter. Often, they will succeed in getting at least a free-floating signature block like the protagonist in our real-life story, but they stop there thinking that is enough. Unfortunately, even with the best initial intentions, many lack an understanding of what really counts as a done document or flail at the last mile and don’t finish things. This can be expensive when you have to pay for the cleanup. Try not to be that person and finish your documents.
Did you know that Fidelity can help you track and manage signatures from key stakeholders including investors, board members, and lawyers?
Sample scenarios are for illustrative purposes only.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.