I am working with a handful of companies expecting to raise an equity round in the next couple months. In some cases, it will be a company’s first real fundraise, with prior investment coming through a bridge round (notes, SAFES, etc). In other cases, it will be a Seed-2 or A round. Regardless, It is a nerve racking time for a founder/management team and with everything else on your mind, ensuring your company’s books and records are in order from a legal perspective is most likely not high on the to-do list to prepare for the financing, but it should be. Here are 3 easy steps you and your team should be taking weeks before you execute a term sheet to ensure you will cut down on deal timeline and, most importantly, legal fees.
1) Start Populating your Dataroom
Often times your lawyers will have records relating to incorporation, stock grants, board consents, etc. but there are non-legal categories of information which your lead investor’s counsel will absolutely request in the course of their diligence which you or your team members will be better equipped to provide (as opposed to your lawyers), like, for example, commercial agreements with customers, financials, schedule of IP assets and descriptions of third-party source code that the company has incorporated in its products, etc. A member of the team should be taking the time to organize, gather and populate the dataroom before the term sheet is signed so when the diligence request comes in from investor’s counsel, all you have to do is send the invitation. Leaving this task in the hands of your lawyer becomes inefficient and time consuming. So do yourself a favor, open up a dropbox account (a now totally accepted venue for investors and their counsel) and take control of creating/populating your dataroom. Not doing so will be costly.
2) Start Collecting Information for Disclosure Schedules
One of the key tasks of a junior associate in connection with a financing is guiding the disclosure schedule process. Often they invite a kick-off call with the client early in the transaction process whereby the associate spends the time (and your company’s money) to hold your hand and give you instruction on how to populate the disclosures in response to the reps and warranties in the stock purchase agreement. Here is a secret - you can save yourself the pain of that call by going to NVCA’s (National Venture Capital Association) website, download the form Stock Purchase Agreement (for free) and read through the reps and warranties (Section 2 of the form Stock Purchase Agreement) in close detail before the term sheet is even signed. To the extent you have an exception to a rep or the rep calls for you to disclose certain information, jot that disclosure down (informally is fine) on a piece of paper. 9 times out of 10 the reps that make it into the Purchase Agreement in your deal will look very similar, if not identical, as the reps and warranties are rarely negotiated heavily in the context of an early stage equity financing. Hand that list of disclosures over to your lawyer and they will be impressed. More importantly, you’ve just saved yourself a 2 hour call (at least) with a junior associate after the deal is in full swing. Woohoo!
3) Start Cozyin’ up with your Cap Table
Arguably the most important step you can take to save yourself a big headache heading into your financing is knowing your current cap table inside and out. It is your chance to start your relationship off on the right foot with your lead investor and helps you and your lawyers with organizing for the diligence process and preparing for drafting deal documents, as well as your counsel’s opinion (which will mostly require your lawyers to opine on the number of securities you have issued up until the financing). So go down each cell in your cap table well before your financing, ensure everyone that has received equity is on there and that anyone who is on there is being shown as receiving the right amount. Sounds simple enough but I can’t tell you how many times lawyers are left with this job. And trust me, it can get costly.