Comprehensive Equity Financing Overview – Timeline, Process, and Documents

Maret Delf

August 24, 2023

This article likely contains much more detail than the average founder needs (or wants!) to know about what’s going on behind the scenes in between signing a term sheet and closing a round. But, you can use this as a comprehensive reference guide when you’re navigating the process. Warning: acronyms abound.

Timeline

There’s typically about 4 weeks between signing a term sheet and the initial closing/funding of the round. This timeline can be extended or compressed by a number of factors (e.g. how complex the terms are, or how much diligence the investors do). This may sound like a long time, but as you’ll see below, a lot goes into the financing process that your lawyers will take care of behind the scenes. Although term sheets usually cover the majority of the crucial terms, there are always other items to negotiate once the more comprehensive documents are being drafted. If you absolutely need the money by a certain date (e.g. to make payroll), tell everyone at the beginning of the process.

Process

After you’ve signed a term sheet, several workstreams will happen simultaneously:

(1) Document Drafting: The lawyers (typically, company counsel) will draft the 5 main financing documents, which are usually based on standard NVCA forms. They’ll also draft the pro forma capitalization model, and all of the ancillary documents. A brief description of each of these documents is in the “Documents” section below. Once your lawyers finalize initial drafts of these items, they’ll send them to your investor’s counsel so that they can review and provide comments. There are usually a few “turns” of these documents back and forth between company and investor counsel as they negotiate (with your and your investors’ input).

(2) Disclosure Schedule: Your counsel will explain the Disclosure Schedule process to you, and get you started on an initial draft. We’ve included more detail on this process below; it’ll likely be the document that requires the most input and time from you and your team.

(3) Data Room & Diligence: You’ll work with your counsel to populate a data room with all of the documents that investors will expect to review in their legal diligence process. You’ll ideally open up the data room to investor counsel ASAP so they can begin reviewing. If there’s anything non-standard (e.g. ongoing litigation), it’ll speed things up to give investor counsel a heads-up about it right after you sign the term sheet. Investor counsel will review everything in the data room, ask questions, send follow-up requests, and will likely ask for any issues that they uncover to be fixed before closing. Especially if your company has been around for a while, diligence can be a large, time-consuming undertaking. So, if you want a speedy closing, it’s best to get the data room fully populated and opened up to investor counsel as soon as you can.

(4) Closing Coordination: Once the documents and diligence are finalized, Company counsel will handle the closing mechanics like collecting signatures, filing the new company Charter, and circulating the final signed docs to all investors and asking them to wire.

Documents

Term Sheet: Describes the major terms of the deal (but there will inevitably be more to negotiate once the process moves forward). The term sheet is typically just between the lead investor and the company; other smaller investors decide whether to participate in the round based on the terms that are already in the executed term sheet.

The 5 Main Documents:

Certificate of Incorporation (aka “Charter”): The company’s current charter is revised to include: the new series of Preferred Stock that’s being sold, investor stockholder protections, and other items. It has to be filed with the Delaware Secretary of State before closing can occur (it’s usually filed the day before closing or even the morning of closing). This is the only document that will need to be formally filed in the course of a normal financing.
Stock Purchase Agreement (“SPA”): New purchase agreement is drafted governing the sale of this series of Preferred Stock. It includes company and investor representations, and closing conditions. More on the company’s representations below in the Disclosure Schedule section.
Investors’ Rights Agreement (“IRA”): Includes investor information rights, pro rata rights, registration rights, and other items.
Voting Agreement: Includes Board composition details and sale drag-along rights.
Right of First Refusal and Co-Sale Agreement (“ROFR”): Includes a company right of first refusal on sales of its shares, and a secondary right of refusal for some investors. Also includes the right of investors to “co-sell.”

Disclosure Schedule (aka Schedule of Exceptions or SOE): The Disclosure Schedule lists all exceptions to the broad representations that the company makes in the SPA. For example, if an SPA rep said “the company has never filed our taxes late” but the company had filed them late one year, you’d add a disclosure to the Disclosure Schedule saying something like “we got an extension and filed our taxes late in 2017” instead of revising the SPA rep itself.

This doc requires the most time and attention from you and your team; your lawyers won’t know enough about your business to know what exceptions exist. They can help you understand what the reps say and give examples of common exceptions, but you and appropriate members of your team will need to do the bulk of the work.
This process can be a pain, but it’s necessary and also protective for your company; it means investors can’t come back later and say “here’s this thing you didn’t tell me about when I invested, give me my money back.” You’re protected if that thing is listed in your Disclosure Schedule.
Investors will also use the Disclosure Schedule to direct their diligence efforts, so getting the Schedule done ASAP will facilitate a quick diligence process (and therefore a quick closing).
All companies will likely have at least a few exceptions to disclose, but the list will get longer as the company grows.

Pro Forma Capitalization Model: The pro forma is an Excel model that calculates the price per share of the new Preferred Stock, models everyone’s post-round ownership, and does other things like calculate any increases to the option pool size.

Ancillary Documents: Company counsel will draft these less-important docs and investor counsel will review them, but they’re unlikely to be the cause of much negotiation:

Board Consent: This is a doc signed by all current Board members approving the financing, the amendment of the Charter, and various other required items.
Stockholder Consent: This is a doc signed by current Company stockholders approving the Charter amendment and other items. The number and identity of the stockholders who need to sign it depends on what your existing documentation requires; your counsel will do this analysis and collect the necessary signatures.
Compliance Certificate & Secretary’s Certificate: Company counsel will draft these short one-page certifications required by the SPA.
Legal Opinion: Company counsel will draft and issue this “Legal Opinion” (if your investors require it - most do), where the law firm itself certifies various things about your company (e.g. that it’s validly formed and in good standing). Investor counsel may have some technical comments, but it probably won’t require your input.
Director Indemnification Agreement: New directors need to sign an Indemnification Agreement, which says that, if they’re sued in their capacity as a director, then the company will be the indemnifier of first resort for the cost of defending them from the suit, etc. Company counsel will draft it, or the investors will send over their preferred form.
Management Rights Letters (“MRLs”): VCs typically need a Management Rights Letter (“MRL”) to satisfy various regulatory requirements. These are usually on a standard form and non-controversial.

Closing Mechanics Stuff:

Company Wire Instructions: You’ll need to send your company’s incoming wire instructions to your investors. Investors will also often ask for your phone number so their finance team can call to verbally confirm the wire info (as an anti-fraud measure).
Email Addresses & Full Names of all Signers: Your counsel will tell you whose signatures they’ll need for closing, and you should provide and/or confirm those people’s full names and email addresses. Your counsel will coordinate sending everyone signature packets, collecting their signatures, and compiling them in the documents. Everything can usually be electronically signed.

Disclaimer: The content provided in the Amplify Legal Hub is intended for informational purposes only and should not be construed as legal advice. Always consult a qualified legal professional for advice tailored to your specific situation.