Money in the Bank – Lessons from Closing Equity Deals

ATM photo by Futureshape on Flickr

You’ve found a great venture partner to give you growth capital. The term sheet is signed. You’ve got a good valuation. Conditions of the deal seem fair. Nothing left to do but a sign a few documents. Ah, if it were only that easy.

The stage between a signed term sheet and seeing the wire come through can be either a nerve-racking mess or a fairly smooth and mechanical process. I think it really comes down to preparation and that you deftly drive the deal to completion.

Following one equity deal I took some time to figure out why the deal went so smooth. You may not have seen some of these tips before but they work. We closed one deal by 10 a.m. on the scheduled closing date.

Before Shopping for Money

  • It is best to dissect and splice/dice your operations a lot before even asking for venture money.
  • Ensure your projections are tight and foot to everything else being said or written (business and sales presentations/materials).
  • Consider going through an audit (or review) and correct any issues before shopping for equity investment.
  • Scan all contracts (vendors & clients) to electronic files as part of your normal contract processing system. Be sure all contracts are dual-signed and complete (all schedules, statements of work, and anything else described in the contracts).
  • Be sure all employee and contractors have signed confidentiality and work-for-hire agreements as part of the standard employment/engagement practices.
  • Review all vendor and client contracts for change of control, assignment, or other impediments to the deal. Keep them out of negotiated contracts with vendors and clients in the first place. This is important because when getting consents for the deal from parties not part of the deal, you could have a vendor or customer extort you for the consent if you are unlucky.
  • Make certain that all intellectual property used in your products is tracked and properly licensed through written and specific license agreements. Open source licenses give lawyers heartburn if they are not properly considered when creating products.
  • Be sure to have all insurance policies in place and up-to-date.
  • Have a back-up plan for contingencies (e.g., debt lenders won’t go along with deal).

During the Deal Closing Period

  • Focus on the deal at hand as the #1 priority. There will be a lot of pressure to divert your attention elsewhere but you must press forward.
  • Focus on closing the deal on time, with an abundance of disclosure, and all issues wrapped up or put on a post-deal actions list (in the agreement and all parties noting this).
  • Be very organized with actions and commitments.
  • Pace yourself. Anticipate what will be needed or needs to be done when. No one will likely tell you this until it is too late.
  • Stick to committed deadlines no matter what. Stay late, really late, work all weekend, get in early, but no matter what, get it done.
  • Return phone calls promptly.
  • Keep track of what documents have been supplied to whom.
  • Use one person as the key communicator in the deal negotiations.
  • Use the best lawyer who will focus on actions, clarity, and precision. Use the most experienced lawyer you can since you will not be able to devote considerable time to reading all the documents yourself.
  • Hash out the deal structure at the high-level during the term sheet stage but drill down into the details of the corporate structure and any tax effects as soon as possible.
  • Bring debt lenders into the fold early enough to avoid delays but late enough not to cloud negotiations with potential equity investors.
  • Be courteous to everyone at all times (this includes auditors late at night on a Sunday).
  • Plan for last minute delays. Brainstorm continuously with lawyers, accountants, and other advisors about anything that may hold up the deal. Talk with the other side of the deal to make sure there aren’t any potential issues or delay brewing.
  • Let your lawyer negotiate the legalese with the other side’s lawyer. However, substantial business issues should be hashed out one-on-one between deal participants.
  • Make a list of post-deal actions as you think of them (by reading documents, conversations, commitments to people).

Once the deal has closed and you see the wire in your bank account then celebrate… but, be sure to get back to work in the morning! You’ve now got new bosses to please.

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