I’m quite surprised that I can’t find a decent blog post or article explaining the closing process in a typical Angel/VC financing transaction. Given that a lot of the entrepreneurs that we work with have never done this dance before, I’m often asked to walk them through it. This process is what you’ll usually see in a VC deal, or an Angel deal in which equity is issued. Signature mechanics would be virtually the same in a convertible debt round, although stock certificates would obviously not be issued.
- Finalize docs
- Create signature packets
- Obtain requisite signatures
- File documents with Secretary of State (DE, TX, etc.)
- Release signatures
- Close the deal, and show me the money
1. Finalize the Docs
Before anything gets done, lawyers and clients have to agree on the docs. Hopefully this doesn’t take too long, but it depends on the attorneys involved and the nature of the deal. Choose your attorneys wisely, and don’t let the tail wag the dog.
2. Create Signature Packets
First-timers are often fascinated with the concept of “counterpart” signatures. While your whole deal may involve hundreds of pages of documents, an experienced firm will usually create a PDF “signature packet” containing only the pages that you need to sign, which they’ll send along with the full documents. Each party signs his or her own counterparts contained in the appropriate signature packet, scans and e-mails them back to the attorneys, and when “Signing” time comes, everything is compiled together, dated, and deemed to be fully executed. Much better than flipping through hundreds of pages to figure out where to sign.
Some firms (including yours truly) will go a step further. They’ll run your signature packets through Docusign, or a similar electronic signature process, which will allow you to electronically execute the documents without having to print or scan a single thing. Makes things easier for everyone.
3. Obtain Requisite Signatures
At the most basic level, a transaction will usually require approval from both the Board of Directors and the Stockholders of the Company before it can move forward. The state of incorporation of the Company will usually have default thresholds that need to be met for those two groups, or the Company’s governing documents may have designated thresholds. If any agreements, such as a Stockholders Agreement or Voting Agreement, are being amended in the deal, those documents will have their own thresholds that need to be met as well. Usually a junior associate will be tracking the signatures received so that everyone can know when to pull the trigger.
When the main parties send their signatures to each other by e-mail, they’ll typically include language like “hold these in escrow until their authorized release.” This is basically saying that they’re handing the signatures over to prepare for closing, but that the docs aren’t to be treated as executed until they give the signal. You’ll also notice that signature pages (other than Board/Stockholder consents) usually don’t have date lines on them, or that you may be instructed to leave the dates blank. That’s because the documents won’t be dated until “Signing” occurs, which can be days after the docs are physically signed.
4. File documents with the Secretary of State (DE, TX, etc.)
Once the requisite signatures have been received, attorneys will work on compiling them together to have nice and neat documents with signatures and all. In a typical financing, an amended Certificate of Incorporation (Delaware) or Certificate of Formation (Texas) will need to be filed, authorizing the new class of stock, along with certain rights associated with that class.
Delaware typically takes a day or two to confirm the filing of the new Certificate, unless you’re willing to pay a few extra hundred dollars for faster service. Nothing happens until a file-stamped copy of the Certificate is returned.
5. Release Signatures
With the appropriate signature thresholds met and filed Certificate in hand, attorneys will typically send e-mails to each other authorizing the “release” of their clients’ signatures. This release means that the deal is considered executed, and the documents will be dated on whichever day this release occurs.
6. “Close” the deal and show me the money
In a smooth, traditional Angel/VC financing, Signing and Closing will occur simultaneously. Once signatures are released, the funding parties will execute wire transfers, and the Company will confirm receipt of those transfers. Then the deal is “Closed.”
Sometimes special Closing Conditions will be listed in the Purchase Agreement that have to be met in-between Signing and Closing. Once all parties are in agreement that those conditions are met, Closing will occur and wire transfers will be initiated. It’s not uncommon for a financing to have an Initial Closing and multiple Subsequent Closings, each involving their own transfer of funds and issuance of shares for those funds.
7. Wrapping it up
Everything else is details. Usually a paralegal of the Company’s firm prints physical certificates, has the Company sign them, and then they’re mailed to the investors. A Form D (SEC filing for private issuances) is filed, and over the next few weeks someone orders bound books of the deal docs so that attorneys can put them on their shelves to show off the deal they worked on. I prefer a well-bookmarked, searchable PDF and save my shelves for family photos, but I don’t judge.