Most entrepreneurs who have never raised money before are always taken aback by the paperwork that accompanies the closing of an investment.
This results in slowing the closing process as there can be a lot of ‘hand holding’ as founders seek to clarify the meaning of terms and legalese.
I thought it would be a good idea to serialize what stages you can expect prior to closing and post term sheet and what documents you will likely encounter.
So you have a great idea, you have built a fantastic product or prototype and you may even have early user and possibly even, dare I say it, revenue.
If you are lucky enough to get through the investment evaluation process then you would be issued with either a Letter of Intent or a Term Sheet.
Letter of Intent.
Most early stage VC’s use an open sourced term sheet from the Seed Summit documents. EC1 Capital uses this as a template for most deals.
The term sheet is normally valid for five working days.
When making an investment, it does help if you have as much documentation to hand as possible, there is a list here.
Post Term Sheet
OK, congratulations! We have agreed terms and the term sheet has been signed. An exclusivity phase is entered into of around 45 days and during this period all the due diligence is carried out.
Very often in early stage companies there is little due diligence to be done. Most of it would focus on the founders and their integrity. Normally the founders must warrant what they say is true, so don’t ever make the mistake of stretching the truth at any stage in discussions as it will reflect very badly on the entire investment process and would likely cause the deal to break down.
What questions can I expect in the due diligence process?
You will be asked to supply various documentation, the list can be extensive but some highlights might be:
Of course a lot of early stage startups don’t have all of this information especially if they are pre launch/pre revenue, therefore we have to try and fill in the gaps where we can. One thing we do like to see is board minutes, this shows the investor how you are thinking, what challenges you, how you are reacting and what progress you are making as you build the business.
Post funding you need to have the discipline to provide a reporting structure and a governance process that will satisfy professional investors.
In Part Two I will look at the documentation that needs to be completed and signed prior to any funding. Keep up to date with our blog, sign up for updates in the right hand column.