Michael McDowell. Image: SeedLegals
SeedLegals’ Michael McDowell takes us through the steps to closing a funding round, and the common pitfalls to avoid.
There’s a lot of investment opportunities and capital in Ireland at the moment. The country is firmly in the spotlight, particularly with the success of our new stable of unicorns. Now is the time to take advantage.
And right now is a good time to get yourself ready for an investment round. If you get organised and start to meet with investors now, you can close a round before the end of this year.
Closing a funding round isn’t as easy as shaking hands and receiving the cash. But it doesn’t need to be complicated either.
Think of your term sheet as your guiding light. As the terms of your agreement, investment lives or dies by this document. If you’re doing a larger round, the term sheet might have been supplied to you by the VC fund or angel investors. Either way, you’ll need to make sure it’s signed by your investors before you accept funds.
Once all documents are signed, you can begin the formal process of closing your round.
Typically, you won’t ask investors to send their money until after they’ve all signed the Shareholders’ Agreement, so bear this in mind when you’re thinking about cash flow. If you’ve hit your minimum investment amount early, or some of your investors are ready to sign before others, you might choose to close your round ahead of the deadline. This can be useful if you’re between investments and the round is taking a little longer than anticipated to complete.
As investments start to land, recording when funds are received is important. Some investors might send you the funds as soon as they’ve signed. As long as all documents have their signature, you’re fine to accept them. Just make sure you don’t neglect your cap table, and keep track of who is paying what.
‘Funding doesn’t need to be a rigid process anymore’
– MICHAEL MCDOWELL
You must host a board meeting with investors to formally approve the round. This can be in person or on a video call, as long as a director signs the Board Resolution.
75pc of your total voting shareholders will need to sign the shareholders’ resolution. You should always aim to get everyone onboard but legally you’ll only need a 75pc majority (usually founders and larger shareholders) to officially close the round.
The last thing you need to do is sign the B5 form and send it to the Companies Registration Office to make sure they know you’ve allocated the shares.
Avoid common pitfalls
Closing a round might sound more complex than you first thought and it’s easy to see how this part of the process can extend way beyond your predicted timeline, especially if investors are slow to sign and hard to pin down. But funding doesn’t need to be a rigid process anymore. Start-ups can mix and match agile forms of funding with traditional funding rounds to balance out the books and bring consistency to their cash flow.
The biggest mistake that founders make early on is that they give away too much equity at the beginning – to advisers, to members of staff – and they give away too much equity on bad terms. Advisers might insist on non-dilution shares or decision-making powers on the board that aren’t justified. This can make the company uninvestable in the future. If you give away too much equity too early, there will be none left for future rounds.
It’s never too early to have an option pool which also demonstrates a good level of confidence and professionalism. Hold firm and strong on your long-term vision.
One of the easiest ways you can ensure sustained cash flow when you’re between rounds is by doing an Advance Subscription Agreement which allows you to collect investment and allocate shares at a later date, leaving you with capital available.
Another avoidable mistake I come across is founders not having a good co-founder agreement. I see so many co-founders going in different directions and even splitting up before they get to a funding round. If you haven’t a good IP assignment in place at the beginning, this can potentially lead to serious issues.
Michael McDowell is country manager for Ireland at SeedLegals, a legal-tech platform for founders and investors.
10 things you need to know direct to your inbox every weekday. Sign up for the Daily Brief, Silicon Republic’s digest of essential sci-tech news.
