The term “closing” can mean different things in different industries, and this blog post covers what we mean by a startup closing an equity financing. The term sheet has been negotiated and agreed upon, and now comes the gray zone where most founders aren’t really sure where the signing ends and the closing begins. I’m here to break down for you what an actual closing is and how it’s different from the drafting and signing of documents, so read on.
Step One: Draft and Review of Documents
When the term sheet has been agreed to (often by signing), the venture capital firm will hand it over to the lawyers to draft the documents (either in Word or in a software system like Fidelity). The lawyers draft the documents in two stages:
- What you’d think of as the main transaction documents (Charter, Stock Purchase Agreement, including disclosure schedule, Voting Agreement, Right of First Refusal and Co-Sale Agreement, Investor Rights Agreement), and then after these documents are circulated and agreed upon;
- The ancillary documents will be drafted as well (ancillary documents being the Officer Certificate, Secretary Certificate, Good Standing Certificate, Management Rights Letters, Indemnification Agreements, Legal opinion, Amendment of Stock Incentive Plan (if applicable), Board Consent, and Shareholder Consent).
Step Two: Circulations of Documents for Signature
After drafting documents, circulating the drafts, and finalizing the documents with input from company and investor, as well as addressing any open diligence questions (including those issues brought up in the representations and warranties), it’s time for the next step. The lawyers will likely be the ones coordinating this step, which involves asking all parties to sign the documents. Don’t mistake this for closing. The signatures are technically “held in escrow.” What does that mean? I like to think of it as keeping the signed agreements locked up for safekeeping and not releasing them, even to the signatories, until they are "finalized." This can be managed by Fidelity (or a similar system). They will be finalized on the date of the closing when the closing date is filled in. Note that between the time that any particular investor signed the documents and the closing, there may have been changes made to the documents that need to be shared with the signatories for transparency and to ensure that they accept the changes.
Step Three: Amended and Restated Charter Filing, Money Wire, Signature Release
Once everyone has signed the documents (but with the signatures still being held in escrow) and all the parties have agreed on the finalized version of the transaction documents, the closing can begin. You will know the closing is happening because the lawyer has filed the Amended and Restated Charter with Delaware (usually with an expedited turn-around service), and the investors are wiring the money. And third and finally, the signatures are released, meaning that the financing documents are finalized and all signatures are applied. Once these three steps have happened, then you know you have closed (as opposed to having just made preparations for a closing).
One thing worth noting about the money your company raises is that you can’t use it until you close. If it shows up in your bank account before the closing is official, don’t spend it. For larger amounts of money, it’s common to set up an escrow bank account for the funds, which prevents you from spending it before it’s yours.
This is the part you celebrate your hard work with champagne and go spend your money! But keep in mind that the press might find out about your financing before your mom does, so have your PR spiel ready for the newspapers.
After the Closing
If you choose to run your equity financing outside of Fidelity, there may be an additional step after closing. The lawyers will finish collating signature pages and dating documents, and then will circulate the fully executed documents (in a closing binder) to all parties. If you’re using Fidelity, however, the documents have signatures and dates applied in a second with the touch of a button, and in another second, the full set of financing documents are automatically available to each party in their Fidelity data room, making this step obsolete.
Stock certificates are often an afterthought and sometimes procrastination is responsible for stock certificates not being created until months (or sometimes years) after the financing. However, the best practice is to create the stock certificates immediately after the financing to update your stock ledger in pace with your cap table. In most cases, they will be signed by the president and the secretary of the company and then distributed to the investor whose name is on the stock certificate. You can read more about this in our blog post on stock certificates and legends.
Closing Thoughts on Closing
If you are starting a financing, it’s important to understand what the phases are from start to finish, from prep work, to closing, to post-closing steps. And now you know!
With Fidelity, you can manage your equity financing from end-to-end using standard Series Seed or NVCA documents.
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.