As you prepare for a fundraising round for your startup company, you’ll quickly realize there is an abundance of administrative information to manage and relay between your current stockholders, new investors, attorneys, and investors’ attorneys. Raising funds, particularly for a preferred stock financing, can feel like a full-time job. You can greatly simplify the financing process by proactively maintaining and tracking information. This will also allow your attorneys to better assist with document drafting, communicating with investors, and finalizing closings.

Here are some best practices to keep information organized and communicate clearly with new investors and your lawyer.

  • Investor diligence materials. Your lead investor will conduct a comprehensive review of your company’s financial, legal, intellectual property, and operational records to ensure it understands all of the risks associated with its investment. Generally, the lead investor will provide you with a detailed diligence request list, outlining myriad contracts, agreements, and data you will provide through a “data room.” The diligence process is time-intensive and thorough. Talk to your attorney about options for a data room and whether or not you will pay for a specific platform, such as Citrix ShareFile or Firmex, or organize files in a common file-sharing system like Google Drive or Dropbox. Your attorney can help you create folder structures that align your data room structure to your investor’s diligence request list. Then, you can easily organize your files into appropriate folders so the investor may easily review and understand the information. You can also simplify diligence requirements beforehand by maintaining records of all tax filings, intellectual property filings, executed copies of all customer, vendor, employment, contractor, lease, loan, previous financing, and other agreements, and other important information. With this information on hand, you will avoid spending time searching for (or re-drafting) important documents during the financing.
  • Good standing and annual reports. As part of the diligence process for your financing, your lawyer will work with you to ensure your company is in good standing in its state of incorporation and properly qualified to do business in any other states where you operate. To simplify this process, you can prepare and maintain details about the location of your employees, contractors, offices, and other physical locations. Occasionally, companies have overdue annual report filings and/or tax bills in one or more of these states, which can affect the company’s good standing or qualification to do business in a state. Make sure you stay up to date on annual filings and any annual state taxes.
  • Final investment amounts. Before closing, you will need to finalize investor capital commitments. This information is included in a “Schedule of Purchasers” at the end of the purchase agreement. In a stock financing, investors will pay a specific price per share. To ensure investors purchase whole numbers of shares (no fractional shares), exact investment amounts will often equal an amount slightly less than the commitments you discuss with investors. Your lawyers will generally use the pro forma capitalization table to calculate exact investment contributions from investors, and either you or your lawyer will communicate those amounts to the investors prior to closing so the investors can initiate an accurate wire transfer. You can help your lawyer by creating and sharing a table or spreadsheet detailing investor commitments at least a week before closing.
  • Investor signature information. Each investor will sign a signature packet to the financing documents to formalize the terms of their investment using their preferred “signature block.” A signature block contains important information identifying an investor and its contact information. For entity investors, these signature blocks evidence who is signing on behalf of the entity. Sometimes, for entities owned or managed by other entities, the signature block might include multiple layers of entity names, however, it will ultimately be signed by an authorized individual. Gather the following information from your investors in a spreadsheet that you can easily share with your attorney:
  1. Investor name
  2. If the investor is an entity, signatory name and title
  3. Investor physical address
  4. Signatory email address
  5. Email addresses for other individuals who will receive notices on behalf of the investor.
  • Directors and officers. Your Board, and certain stockholders, may need to approve your financing round and the documents executed in connection with the financing round. Additionally, certain company officers, such as the Chief Executive Officer and Secretary, may need to sign specific financing documents before investors wire their funds. If you have accurately updated these parties about the terms, structure, and other details of the financing round, they will be able to quickly execute any consents or other approvals required to close the round. However, if they are unfamiliar with the deal terms, these parties may need more time to review the documents they are approving, which could delay your closing date. When you are preparing for closing, make sure all company directors, officers, and major stockholders are on the lookout for any signature requests on their applicable consents or approvals. The last thing you want is to have to chase down a Board member’s signatures the day of closing!

Following these best practices will help ensure that your financing round runs smoothly. Your lawyer can help you manage and track information throughout the process and help you understand the appropriate time to gather information and communicate with the various parties involved in the transaction.

Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.