Intro: Prevent mistakes and keep costs down

• Good relationship with future investors: Make sure you are close to your future investors. Periodic calls – be it to enquire about something related to the contracts, your business, or even for personal reasons – create trust and make it much easier to resolve contractual details during the process. It is crucial to keep investing in these relationships!
• Managing your own lawyer: It should be a given that you are working with a great lawyer with solid startup experience. The clearer you are regarding your needs and the less you involve the lawyer in nitty gritty negotiations, the lower your final bill will be.
• Involvement of other lawyers: Ideally you agree with the new investors to only have one lawyer – this makes things much easier and cheaper. However, especially in later stage rounds, there are typically other investors involved. Coordinate upfront who it will be, and explicitly agree with all new investors to keep costs down.
• Take the lead: Do not let the lawyers take over the process. You should be controlling it. While your lawyer may support you in the negotiation of specific points that are crucial for you, it should be you who defines the key contents and agree over them with the new investors.
• Keep it vanilla: Use standard contracts and keep to them as much as possible. You are not the first startup to do a financing round, and not the first one to do an anti-dilution clause or plan for an IPO. All that stuff has been defined thousands of times – and if you have both an experienced lawyer and experienced investors, you will find standard solutions that are acceptable for both sides.
• Be pragmatic: While investors and their lawyers can be stubborn, some founders can be even worse. The fear of losing a certain control over the startup can be stressful – and this becomes very clear in this phase as you define the details. Relax: slowly losing control is part of building a fast-growing tech company. Discuss with your lawyer what is standard, and go for that.
• Legal cost: We have seen many cases where legal costs exploded in this phase. Depending on complexity, geography and company stage, legal costs should be in the range of USD 5k-50k. Think about setting up a cost cap for the elaboration of all needed documents up to closing – or at least get an estimate from the lawyer(s) and ask for early input in case costs are higher. Such a setup will prevent an ugly surprise.

Work out a first version of the needed contracts

Negotiation with investors

• Warranties: This is a topic that often results in heated discussion. Investors want to be sure that the provided information is true and complete – and if not, get their money back or receive better terms. These warranties typically must be burdened by the founders, who are driving the diligence process. It is not uncommon that the SPA includes a clause where founders must pay a penalty out of their private wealth in case of infringement. A pragmatic solution for this can be a clause such as “The data room is accurate and complete to the best knowledge of common shareholders”, with a small relative penalty (e.g., 20% of an annual salary) at the very best.
• Reporting: Beware of putting comprehensive reporting requirements in the SHA. This clause may cause trouble for years to come. Quarterly reports are ok – but do not further define what this is (at the beginning maybe just a non-accrued CF-statement, enhanced as you grow, will be enough). Some investors may want to see monthly reporting; while providing some monthly KPIs may be something you do, we recommend not to include this in the SHA. Budgets are a similar topic – you may do this, but move to rolling six-month planning or other methods – again, keep it out. Remember: Adding things to what is defined in the SHA is always easy – but reducing is usually close to impossible. Most startup CEOs spend too much time on shareholder reporting, and too little on internal control.
• Negotiation strategy: Some founders explicitly agree with their lawyers to play “good cop bad cop”. With the lawyer being the bad cop – after all it is you who needs to get along with the investors in the future, not the lawyer. While this can work to get some clauses through, experienced investors will quickly see through the plot. So while being tough about certain clauses makes a lot of sense, we recommend not to play any games in the process.
• What happens if you do not find an agreement? Frankly, this should not happen if both parties are professional and speak constructively. Having said this, there are situations where an (unexpected) point leads to a standstill. If you have enough other investors accepting a clause and/or new investors wanting to participate, you may play hardball. But this is more of a worst-case scenario than a strategy.

How should you deal with side letters?

• A financial institution wants to invest but for compliance reasons needs you to sign a contract specifying that you will not do any business in blacklisted countries such as North Korea. While every investor wants you to comply with relevant rules and regulations, such a specific clause will most likely not be required by other investors.
• A strategic investor wants to invest but asks for a first right of refusal to partner in a specific business area. While this can be attractive, it could also limit your future business (and exit) options. So you will want to be very careful going for such a side letter.

Finalize due diligence

Signing: Keep it all electronic, but be precise and transparent

Efficient management of cap table and ESOP

• Carta
• Ledgy
• Capdesk

Get the money into your account

Celebrate!

• Special, but cost-conscious: Having raised a big sum of money means you should be throwing yourself a nice party. The time of buying cheap supermarket beer and eating a pasta dinner has come to an end… – NOT! Keep that low-cost spirit – now more than ever. We will discuss this topic in detail in the next phase. But while you do want to organize something special – having a few beers at the office would not be enough – it is crucial to keep costs under control to prevent sending out the wrong message.
  
• Communication: You will want to make a short speech at the event. Describe the ups and downs of the fundraising phase. Maybe you have some funny anecdotes (there typically are many of those). You should mention that the money itself is not really that important – but that it does enable you to reach your vision!
  
• Outlook: Mention that you are now fine-tuning your strategy and OKRs for the coming 2-3 years. Tell them that they will all be involved in this process, and that you will get back to them over the coming weeks. (Note: We will discuss this in the next phase.)
  
• Celebrate! And don’t worry if a few team members come in late the next morning …